The development of local government financial vehicles in China: A case study of Jiaxing Chengtou

Abstract

Financial intermediaries have been widely used in urban development. Since the global financial crisis, it has been an urgent task to understand their operation and implications for financial risks. This paper examines emerging local government financial vehicles (LGFVs) in China. We review their history, current status and underlying financial mechanisms. Confronting the global financial crisis, China has taken a stimulus plan to invest four-trillion Yuan in urban development to stimulate the economy. The plan has been largely fulfilled by the LGFVs. This paper investigates the case of Jiaxing City Construction Investment Corporation (Jiaxing Chengtou), which plays a role of LGFVs. We find that it mainly uses bank loans and bonds to finance land and infrastructure development. To borrow from the capital market, Jiaxing Chengtou collateralizes allocated stateowned land and enhances credits by build and transfer protocols with the city government. However, the enterprise did not manage to pay back its loans, which has led to further borrowing. Due to the central government's control, Jiaxing Chengtou has been nominally detached from the municipal government since 2012, but it maintains a financial role. It has been re-packaged with other LGFVs to access foreign bond markets. The paper reveals how LGFVs act as financial conduits to connect local governments with the financial market in China.

The long shadow of the state: financializing the Chinese city

“…Land-based finance is a key mechanism for infrastructure finance (Wu, 1999). Recent studies indicate the role of Urban Development and Investment Corporations (UDICs) in organizing land development and capturing land value (Huang & Chan, 2018;Feng et al, 2020;Jiang & Waley, 2020;Li & Chiu, 2018;Theurillat, 2017;). An important mechanism for land value capture is "industrial linkage and spillover" (Su & Tao, 2017).…”

“…The fiscal stimulus package injected massive investment in infrastructure and property development, which led to a largescale housing boom. However, credit expansion was based on land as major collateral (Feng et al, 2020;Wu, 2019). Faced with land appreciation, UDICs quickly mobilized capital for land development.…”

“…Faced with land appreciation, UDICs quickly mobilized capital for land development. They transformed from development agencies to local financial platforms (hence known as LGFVs) (Feng et al, 2020(Feng et al, , 2021Pan et al, 2017;Wu, 1999). The debts incurred by UDICs, due to local government guarantees, created an alarming scale of local government debts.…”

“…UDICs are state-owned enterprises supported by the local government to carry out urban development tasks (Feng et al, 2020(Feng et al, , 2021Jiang & Waley, 2020). One of the earliest UDICs was Shanghai Municipal Investment Corporation (SMI) established in 1992.…”

Changing roles of the state in the financialization of urban development throughchengtouin China

“…Chengtou have various forms and are usually responsible for specific projects, such as redevelopment projects (Su, 2015), new town development projects (Li & Chiu, 2018) and mega-events (Li & Xiao, 2020). As for operation, chengtou rely heavily on stateowned land as assets (Zhang, 2018) and land conveyance fees (LCFs) for debt repayment (Feng et al, 2020;Jiang & Waley, 2018). The financial role of chengtou expanded in the post-crisis era.…”