Debt Binge Leaves Chinese Regional Companies on Brink of Default

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Companies controlled by Chinese local governments have avoided defaulting on their bonds so far. They will not continue to be so lucky, the Financial Times reported. Officials are taking a regulatory axe to the implicit supports that have allowed hundreds of local government financing vehicles to stagger on. Rising rates and a slowing housing market are compounding their funding problems, and some local governments may even be laying the groundwork for a market failure by admitting to falsifying economic data. As the financing environment for these companies becomes squeezed, the economic impact will be felt in weaker infrastructure activity and an associated drag on Chinese economic growth in 2018. The central government’s challenge will be to contain the fallout from an eventual bond default by one of these companies. Originally set up to bypass restrictions on direct borrowing by local governments, LGFVs have been an important driver of infrastructure investment, but also of corporate indebtedness. Read more. (Subscription required.)