Hudson Lockett and Cheng Leng, reporting from Hong Kong, paint a cautiously optimistic picture of central government efforts to help local governments retire their massive indebtedness (Report, December 7).
The central government has found ways for local governments to whittle down some of their debt, through debt swaps and state bank uphold for refinancing, as well as limited special purpose loans, which has inspired Chinese investors to believe that the state is thus offering an implicit assure against default. This belief has led them to buy offshore dollar-denominated local government-issued bonds (LGFVs) in greater numbers.
Yet such confidence appears misplaced as central government intervention amounts to tinkering. With Rmb60tn in LGFV bonds remaining outstanding, one wonders if the central government has the capacity to refinance such an amount, let alone the will to do so, considering President Xi Jinping’s gradual turning away from the market in favour of greater state planning. Default may be the state’s only option, for practical as well as ideological reasons, making the skittishness of foreign investors the more realistic posture.
Albion M Urdank
Emeritus Professor, University of California, Los Angeles, US
