China’s Local Government Financing Vehicles (LGFV)
Estimates from Goldman Sachs (www.goldmansachs.com) show that outstanding levels of debt are piling up for China’s local government financing vehicles (LGFV). This is significant as it is estimated that China’s LGFVs reportedly account for 54% of China’s GDP.
Beginning in 2013 China began using a system of LGFVs to stimulate economic growth through infrastructure spending. Despite China’s somewhat secretive behaviour about its financial vulnerabilities Goldman Sachs estimates that China’s LGFVs have outstanding debts that add up to over $8 trillion USD.
Weak and Risky
The Federal Reserve reported in its November 2021 publication (www.federalreserve.gov/publications/files/financial-stability-report-20211108.pdf) that many of China’s LGFVs are considered “weak” and “risky”. That is to say that if China’s LGFVs collapse the fallout for China’s rising debt crisis will be much worse than the fallout from its second-largest property development firm Evergrande. According to MSM outlets such as CNBC, Evergrande is more than $312 billion in debt. That as time passes, Evergrande is looking more and more like it will default on coupon payments in domestic and international markets (www.cnbc.com/2021/11/18/china-evergrande-default-is-highly-likely-sp-says.html).
The term financial contagion refers to the spread of disrupted markets, that carries from one jurisdiction to another, with mostly deleterious effects. These disrupted markets are observed through co-motion in exchange rates, capital flows, and stock prices. Financial contagions are a potential risk for countries that are looking to integrate their financial systems with international financial institutions and markets.
China’s Brewing Debt Crisis
Financial analysts believe that China’s financial instability could spill into the American markets because of the voluminous trade between the two countries. When financial instability is on the horizon and key operatives begin defaulting on coupon payments investors become nervous and disincentivized to pour capital into defaulting systems. Of note is the reporting by the Epoch Times that discussed how Japan recently declared that Yuan-denominated (Chinese currency) investments will not be included in Japan’s $1.75 trillion government pension investments going forward (www.theepochtimes.com/chinas-local-government-debt-the-hidden-threat_4030918.html).
Elaine Allan, BA, MBA
Technology & Business Blogger
Vancouver, BC, Canada