China Government Permits Local Governments to Raise CNY 1T via Bond Sales

Based on sources, China will allow local governments to raise approximately 1 trillion yuan ($140 billion) through bond sales to repay the debt of local-government financing vehicles (LGFVs) and other off-balance-sheet issuers.

Municipal debt poses a significant risk to China's economy and financial stability, according to economists, following years of overinvestment in infrastructure, plummeting returns on land sales, and skyrocketing COVID-19 costs.

According to sources familiar with the matter, the finance ministry has informed relevant authorities about the "refinancing bonds" programme, and quotas have been set for each region.

Last month, Chinese leaders pledged to unveil a "basket of measures" to address local debt risks without providing specifics, indicating concerns about a potential chain of municipal debt defaults destabilising the financial sector.

According to policy advisers and economists, measures to bail out some municipalities are likely to include debt swaps, loan rollovers, and possible central government debt issuance.

The reported new step would be small - 1 trillion yuan is only 1.5 percent of the 66 trillion yuan ($9.1 trillion) in total debt held by LGFVs, which cities use to fund infrastructure projects, according to the International Monetary Fund.

LGFVs play a key role in those projects, a top growth driver for the world's second-largest economy. But some analysts say they have become the "black holes" of the country's financial system, with the surging debt loads and weak revenues beginning to alarm investors.