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S&P: Debt maturities loom over China's local government financing vehicles

Debt maturities loom large over China's infrastructure sector and may aggravate problems for local government financing vehicles at a time when the country is counting on infrastructure development to bolster slowing growth, according to a report by S&P Global Ratings.

LGFV debt, valued at 3.8 trillion Chinese yuan maturing in the onshore bond market in 2019-2021, has slowed significantly after tighter regulation, but the existing debt burden along with hidden debt are still major concerns.

"Keeping the lid on new debt isn't enough; paying down existing debt is also critical," said S&P Global Ratings credit analyst Gloria Lu. She recommended increasing local government income through land sales and taxation.

The government plans to restructure debt, which would buy time for the LGFVs by reducing risk and costs, said Lu. However, relieving debt burdens could take a long time. If China is unable to deal with the debt crisis, market disruptions and financial system destabilization could follow.

"For the next 12-18 months, LGFVs still have systemic importance to the economy and the financial system. Regulators are likely to be assessing the implications, practicality, and timing of letting go of some insolvent LGFVs," said Lu.