The Bank of China said on the 30th that a default occurred in LGFV (local government financing vehicles), a special corporation for financing of some local governments, and the quality of its assets deteriorated, Reuters reported.
According to reports, the Bank of China held a press conference to release its earnings report for the first half of the year.
The Bank of China, one of China’s four major state-owned banks, explained, however, that its LGFV business is steadily progressing and risks are under control.
When Chinese local governments build certain infrastructure facilities, they often raise funds by creating a special corporation called LGFV and then issuing bonds.
In fact, it is money raised by local governments, but it is not reflected in the official balance sheet, so it is not included in the official statistics of the central government.
In February, the International Monetary Fund (IMF) estimated that LGFV procurement funds in China increased from 40 trillion yuan in 2019 to 66 trillion yuan at the end of 2022.
Goldman Sachs, a Wall Street investment bank, also estimated that the total debt of Chinese local governments, including LGFV’s hidden debt, would reach about $23 trillion.
Local governments’ finances are also deteriorating as the real estate market, which accounts for 25% of GDP, stagnates amid China’s economic slowdown.
Local governments in China are under financial pressure as the real estate market freezes and land license sales, the main source of income, are being hit at a time when they have spent huge amounts on quarantine costs for three years of “Zero COVID.”