China's $2 trillion domestic bond category is approaching a dangerous turning point, as issuers face difficulties refinancing debts that are due.
Net financing - the value of issuances of new yuan-denominated bonds less outstanding bonds - of the country's local government financing mechanisms, or (LGFVs), recorded a negative figure in the fourth quarter of 2022 for the first time in at least 4 years, according to S&P Global Retings, and although net funding turned positive last January, it was still down 83% compared to the previous year at 48.9 billion yuan (equivalent to $7.1 billion).
The funding crisis, which has coincided with increased cancellations of bond offering deals, adds to the signs of tension on a vague side of a debt market long seen by skeptics vis-à-vis China as a threat to financial stability but has so far avoided a huge wave of defaults.
Despite Asia's largest economy shaking off the stringent zero-Covid policy constraints, 22 issuers within the local government funding mechanism failed to pay off commercial payment paperwork with last January deadlines, an increase of 5 issuers compared to the previous month, according to Huaan Securities. The securities of these local governments' financing arms have also been subject to renewed scrutiny following the extension by the construction company of Guizhou Province in the south-west of the country of the maturity of loans totalling approximately 15.6 billion yuan for 20 years. A move of this kind may presage an increase in similar offers and indicate an increased risk of restructuring for private credit holders from the versions of the local government funding mechanism in financially fragile provinces, according to Fitch Rittings' report.
Laura Lee, credit analyst at S&P Global Retings, explained: "Investors must exercise caution over the debt of the low-quality provincial local government financing mechanism. If the refinancing process is further hampered and government resources cannot be allocated in a timely manner, other debt crises or even defaults may result in public projects.
