Beijing Austerity Drive Prompts Local-Government Ratings Cut

Rating agency S&P has downgraded seven Chinese local-government financing vehicles (LGFVs), on the view that local governments are less likely to provide bailouts if these companies verge towards default, highlighting the punishing impact of Beijing’s austerity campaign, the Financial Times reported. For the last decade, Chinese local governments have used such off-budget vehicles to finance infrastructure projects that skirt restrictions on direct borrowing, prompting warnings from global watchdogs and China’s finance ministry. In 2014, China’s parliament legalised direct municipal bond issuance by provincial governments, a move to “open the front door and close the back door” for local borrowing. Off-budget borrowing by LGFVs has continued, however, because annual quotas for direct bond issuance have generally been too small to satisfy local governments’ appetite for infrastructure construction, a crucial driver of economic growth. Read more. (Subscription required.)