Debt on a downward spiral: China’s LGFVs

Analysts fear that defaults in the shadow banking space could push into public bond markets. Will Beijing be able to implement reform?

China’s local governments have a ballooning debt problem that cries out for urgent resolution, but analysts suggest that this would be a herculean task. If the problem worsens, it will affect banks, interest rates and GDP growth in China, as well as offshore bonds issued by government-owned companies.

One of the primary concerns is that local government financing vehicles LGFVs some of which have already defaulted on shadow banking instruments will start to default on their publicly traded bonds.

This, explained a report by published this month by US think tank, the Centre for Strategic and International Studies CSIS, could create new credit risk...

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