China’s local government debt clean-up makes progress

China has been working through local governments’ debt burdens, which had become a problem as revenue from land sales failed to cover spending obligations and ambitious local development plans.

Financing costs have fallen, easing the immediate pressure to roll over debt, but these efforts are not yet producing broad deleveraging for balance sheets. And lower national funding costs do not mean uniform fiscal health.

Our chart looks at local government financing vehicle (or LGFV) bonds. Some large coastal markets (such as Jiangsu and Zhejiang, adjacent to Shanghai) carry heavy LGFV bond burdens relative to recurring budget revenue but still borrow cheaply; smaller markets can face higher rates despite much lower absolute indebtedness.