China is pushing local governments to invest more in building up infrastructure despite growing debt that local governments are having a harder time repaying.
Officially, China’s debt comes in at 38% of the GDP, which is less than half the average in advanced economies. However, the Chinese government has continuously issued debt to local governments through off-the-balance-sheet “local government financing vehicles” (LGFVs). When the debt issued by LGFVs are factored in, debt comes to about 70% of the GDP.
Currently, there are about 11,566 LGFVs in China. LGFVs borrow money from the national government and then spend it through local government projects and initiatives. These lending practices are increasing in risk as LGFVs are becoming less able to pay back their debts. There have been 15 separate times when LGFVs have not been able to repay a loan.
However, the rate of LGFV borrowing has increased at 20% annually over the past five years, outstripping the national debt growth rate. The Chinese government has worked to decrease its overall lending to LGFVs for a period of time. However, when infrastructure investment was just 1.6% higher in May than the year previously, the Chinese government grew worried about a slowdown in GDP growth and have started pushing for increased spending.
Despite the risk behind lending to local governments through LGFVs the Chinese government has consistently relied on them as the means of sustaining a growing national infrastructure.