China could be facing a “debt iceberg with titanic credit risks” following a boom in infrastructure projects by local governments around the country, S&P Global has warned. Local governments may have accrued a debt pile hidden off their balance sheet as high as Rmb30tn to Rmb40tn ($4.3tn to $5.8tn) following “rampant” growth in borrowings, the rating agency estimated. The mounting debt in so-called local government financing vehicles, or LGFVs, hit an “alarming” 60 percent of China’s gross domestic product at the end of last year and was expected to lead to increasing defaults at companies connected to regional authorities.
The estimates come amid long-running concerns over debt levels in China, which has seen what some analysts regard as excessive bank lending in the wake of the financial crisis that has created unsustainable bubbles in property and other assets. Beijing has sought to crack down on excessive borrowing by acquisition-hungry private companies such as HNA Group, Anbang and Dalian Wanda. More broadly, the government has attempted to pare back debt in what Moody’s has called the most highly leveraged and heavily indebted corporate sector in the world. But in the face of a slowing economy and rising trade tensions with the US, Beijing has in recent weeks begun to ease off on its deleveraging policies.
Richard Langberg, an analyst at S&P, said there are Chinese cities with “hundreds” of the local financing vehicles across the country. While defaults at a handful of smaller LGFVs could be handled by the financial sector, “if they start to let the bigger ones go then we are getting into uncharted territory,” he said. For many years, local governments were not allowed to raise debt in the capital markets and resorted to creating separate vehicles to finance infrastructure projects, often working under pressure to hit high growth targets. LGFVs acted as a primary channel for funding those projects, and a key driver of economic growth.