Perceived Weaker Support Strains China’s Local Government Financing Vehicles

China’s Local Government Financing Vehicles (“LGFVs”) have incurred higher funding cost amid tightened regulations on their debt financing and perceived lower possibility of support from their respective local governments(“LGs”) in case of need. Investors’ risk aversion has pushed up their borrowing costs, particularly for issuers with weaker credit profile, i.e. with onshore ratings of ‘AA’ and below.

LGFVs are facing increasing refinancing risk as they have been relying on debt borrowing to support their operations, resulting in rising indebtedness and deteriorating debt servicing capability. As support from LGs would be more likely for those highly rated LGFVs performing an important role in supporting the regional economy, pressure on issuers with lower ratings would be more pronounced. In addition, LGFVs with lower ratings generally have relatively weaker operating and financial performance or located in areas with weaker economic conditions or fiscal positions.

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