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.
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.
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