China's deficit plans put squeeze on local govt financing

Beijing

CHINA'S plan to run its biggest fiscal deficit since the global financial crisis may help develop its bond market, but the extra competition for funding could sink some of the major providers of local government financing.

Local government financing vehicles (LGFVs), which were invented to skirt restrictions on local government fund-raising, are already under pressure from Beijing's drive to reduce local debt and migrate provincial financing to a more transparent municipal bond model.

With over US$3 trillion in outstanding debt that funded essential infrastructure, along with some vanity projects and speculative adventures, LGFVs are finding it hard to service their existing debts, let alone raise new money when loans fall…