China’s hidden stimulus: LGFVs local investment platforms load up on bonds
Chinese officials have made many statements in recent months about reducing risk in the financial system, and “deleveraging.”
However, while tools such as higher interest rates and rules to reduce risky assets have targeted the weakest banks, credit continues to flow into the economy. Credit such as Total Social Financing, which tracks mainstream credit such as bank loans and is used by the government as their measure for credit, is rising at a rate double GDP growth. But even this measure doesn’t include all forms of financial stimulus.
In this report we look at two measures of credit that are not as widely tracked – local government investments funded by bonds, and social housing – that are clearly designed to bypass credit limits on the banks. This non-standard credit growth favors local GDP growth at the expense of debt reduction. In particular, investors in offshore and onshore local government bonds need to understand the risks they are taking with this continued growth of local debt.
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