The 2018 new asset management regulation and LGFV bonds in China

Fiscal Policy and the Government Balance Sheet in China

“…Qiu et al (2022) find that there is a strong negative correlation between the credit spread of LGFV bonds and the revenue of local governments. Also, credit spread of LGFV bonds at issuance is lower in provinces with higher income pe capita and that relationship has strengthened after the introduction of the New Regulation.…”

“…Since the debt recognition in 2014, LGFV debt continued to rise by 6 percentage points of GDP to reach an estimate of 34 percent of GDP as of end 2018, while their profitability and interest coverage deteriorated. Recent empirical evidence based on LGFV pricing also suggests that the implicit local government's guarantee perceived by the market did not weaken in the aftermath of the New Regulation (Qiu et al 2022). 20 Moreover, regulators have relaxed bond issuance rules and allowed policy banks to refinance local government debt in pilot cities.…”