China’s crackdown on borrowing by local governments is forcing state-run entities in even some of the wealthiest provinces to tap costly credit from non-bank lenders, a stopgap that’s building up risks in an opaque corner of the financial system.
The borrowing marks a return of China’s shadow banking market, which is more loosely regulated than traditional lenders and had been reined in over the past few years in a bid to reduce risk.
Since September, industrial investment arms and financing platforms owned by local governments in provinces including Shandong have borrowed billions of US dollars in total from trust companies and leasing firms, according to sources familiar with the matter.
The rates charged are 8 per cent or higher, more than triple the cost of borrowing in the bond market, the sources said, asking not to be identified discussing private information. Financial institutions that make up China’s shadow banking system are willing to extend the funding partly because they are short of assets in a low-rate environment.
The increased demand reflects the fallout from Beijing’s campaign to keep provinces from amassing debt through state-owned companies known as local government financing vehicles, or LGFVs. The effort has choked off their access to cheaper funding such as regular bank lending and bond sales, contributing to a pullback of investment in the world’s second-biggest economy.
“Platforms in rich regions wouldn’t have to resort to such expensive funding should fiscal discipline be less strict,” said Jacqueline Rong, chief China economist at BNP Paribas. “The campaign to resolve hidden debt and the fiscal discipline might be a key reason for the deep slump in infrastructure investment.”
