China is steering its municipal borrowers away from short-term bond issuance, the latest move in Beijing’s long-running campaign to defuse what has quietly become one of the biggest debt problems in global finance.
The directive targets local government financing vehicles, or LGFVs, the quasi-governmental entities that Chinese cities and provinces have used for decades to fund infrastructure projects, from highways to high-speed rail.
What’s actually happening
The National Development and Reform Commission, China’s top economic planning body, has been discouraging LGFVs from issuing higher-cost offshore debt. The guidance is specific: bankers should avoid underwriting offshore renminbi notes yielding over 4% or US dollar securities exceeding 5%.
LGFVs currently hold over $100B in overseas bond debt. That’s a staggering number, roughly the GDP of Morocco, and it represents just the offshore slice of a much larger local government debt picture.
