LGFV = Local Government Finance Vehicle

This is a bond issued by a PROVINCIAL government in China (like Sichuan, Tibet, Guangdong, etc)

So it is basically them taking out a loan. They are taking out a lot of these loans. Backed by land revenues and public assets to borrow money from banks or institutional investors.

Remarkably, we find that unlike our initial sample of bond issues, recent bond issues virtually all state explicitly in the prospectus that they carry no security. Thus, the popular image of local governments wildly overpromising with guarantees they are not legally empowered to give seems, at least as far as recent bond issues are concerned, to be wholly wrong. This in turn calls into question the figures commonly provided for local government debt, since they often include LGFV debt that local government is neither legally nor morally obligated to pay.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2821331

So what it sounds like, is that the local governments will default on their loans. But they won't actually have to pay anything, because the loans had no terms stating so. So what happens then?

I'm asking here because anything in the MSM has the "CHINA IS FINISHED FOR SURE THIS TIME" bias, which is really tiresome

  • howdyoudoo [comrade/them]
    ·
    4 years ago

    i understand how a neolib brain would go “well, if im not legally obliged to repay, I won’t” but that doesn’t mean that thats how it works in China

    lmao im not a neolib

    I'm just a semi-literate in finance and trying to understand this, and what the ramifications are. One thing in particular is WHO is investing in the LGFVs? And why?

    Like it could simply be that a bunch of investors overestimated the ability of Chinese Provinces to repay, and went all-in. And if they default, nothing much is going to happen except that there'll be a lot of bagholders.

    • Yanqui_UXO [any]
      ·
      4 years ago

      Sorry, i didn't mean to imply you are a neolib, just that the Western MSM is

      • howdyoudoo [comrade/them]
        ·
        4 years ago

        np. Found this, seemslike a good article: https://investors-corner.bnpparibas-am.com/investing/chinas-local-government-debt/
        key points:

        1. LGFV debt is highest in less-important provinces (inner mongolia, western)
        2. the TOTAL debt of China (including LGFVs) is still much lower than the US
        3. most of the debt is domestic/RMB

        It seems like the end result of all this, is just that it make China look MUCH healthier than other countries, by offloading the debt responsibility from the central to the local governments. But actually, China is just "as healthy" as other countries, debt-wise.

        Neolibs also like screeching about the housing bubble, but that part just seems like a complete nothingburger. They have high down payment requirements, whereas the US was selling mortgages from literal hobos in 2008 (no offense to hobos).

        • Yanqui_UXO [any]
          ·
          4 years ago

          Looked through Michael Roberts' blog and he has this prediction from 2018:

          This difference between Keynesian measures in capitalist economies and China’s state-directed investment is about to be tested again. Most mainstream economists are predicting that China will take a hit from any trade war with Trump’s America and economic growth is set to slow – indeed, there is a growing risk of a huge debt-induced slump. But the Chinese authorities are already reacting. Ordinary budget deficits (fiscal ‘stimulus’) are being supplemented with outright state funding of investment projects (dark blue in graph).

          Most of this government investment funding is coming from sales of land by local authorities. Through local government funding vehicles (LGFV), they build roads, homes, cities by selling land to developers. But funds also come directly from the national government (80%).

          We can expect such funding to rise and investment projects to expand if China’s exports drop back from a trade war with the US. State investment will keep China’s economy motoring, while the major capitalist economies flounder.