Lianhe Global examines a basket of elements when analysing the credit profiles of China’s Local Government Financing Vehicles (“LGFVs”). In this commentary, we highlight some of the key factors which are important for a thorough credit analysis of Chinese LGFVs.
1.Business models and contractual agreements
In most cases, whether an LGFV has a clear business model with sufficient funding to support its public welfare function is primarily based on the existence of and content of the contractual agreements signed between the relevant government departments and the LGFV. Projects without signed agreements usually have high uncertainty in future revenue recognition and payment. Large-scale construction in progress or inventory is likely to occur, which may require significant external financing and adversely affect the liquidity of the LGFV.