With Beijing pivoting on key policies, a cyclical recovery appears to be underway. But structural issues – such as the heavy debt load of local governments — haven’t gone away. On Dec. 30, Zunyi Road & Bridge Construction Group from Guizhou province, one of the poorest regions, extended its bank loans for two decades. It pledged to honor payments on its bonds.
The restructuring caused a splash among market participants. Local government financing vehicles, or LGFVs, are mostly tasked with building infrastructure projects. They allow local authorities to raise money without having the debt appear on the government’s balance sheet. This “hidden” debts and contingent liabilities have risen to 47 trillion yuan ($7 trillion and 39% of GDP) in September, up from 20 trillion yuan at the end of 2016, according to Adam Wolfe, an economist at Absolute Strategy Research.
No one outside of China knows the true nature of the ledger, but I do know they have enough gold to back the system up.