China is facing a local government debt crisis, and its rescue plan has only provided temporary fixes, according to a report by S&P Global Ratings. The measures implemented a year ago, like a debt-swap program and loan restructuring, aimed to defuse the financial time bomb. However, the risk of default remains significant, and the debt is expected to grow in the next two years.
The report highlights that China’s local government financing vehicles (LGFVs) have seen moderate debt growth but are still at risk. Despite efforts to mitigate risks, defaults on non-standard debt and commercial paper are likely to happen. Smaller regional banks, especially in northeastern and southwestern China, face higher exposure to weak LGFVs.
While government officials claim debt problems are under control, missed interest payments and defaults by LGFVs in private transactions show ongoing challenges. The IMF estimates China’s LGFV debt at 66 trillion yuan, over half of the GDP. With government finances not showing improvement, the situation remains precarious.
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