China's LGFVs may struggle to tackle RMB3.8 trillion maturity wall In 2019-2021

HONG KONG -- Looming debt maturities in China's infrastructure sector are exacerbating the difficulties for local government financing vehicles (LGFVs), according to a new report from S&P Global Ratings.

The report suggests that RMB3.8 trillion (US$560 billion) of LGFV debt is maturing in the onshore bond market in 2019-2021.

LGFVs have also raised a large amount of hidden debt to support infrastructure projects, referring to debt that is off the budgets of their parent governments.

It is not clear how high these hidden debts are, but they could be higher than official disclosures among local governments, S&P says. Growth in LGFV debts reportedly slowed considerably last year following tightened regulations, but no quick fix is in sight to clear existing debt burdens.

"Keeping the lid on new debt isn't enough; paying down existing debt is also critical," said S&P Global Ratings credit analyst Gloria Lu.

"Debt restructuring could offer a temporary reprieve, but ultimate repayment of most debt will hinge on improving the fiscal income of local and regional governments, such sound assets, and therefore affect only a fraction of the total.

"Restructuring would buy time for the LGFVs by reducing refinancing risk, spreading their maturity profiles, and reducing financing costs. In turn, the impact on credit profiles would be positive," said Ms. Lu. "But it could take more than 10 years for regions with high off-budget debt to offload their burdens, as through land sales and higher taxation."

"China is counting on infrastructure development, along with other fiscal stimuli, to sustain economic growth and social stability.

"For the next 12-18 months, LGFVs still have systemic importance to the economy and the financial system. Regulators are likely to be assessing the implications, practicality, and timing of letting go of some insolvent LGFVs."

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