Local Government Financing Vehicles (LGFVs) – A Lens of the Potential Financial Instability in China

Open Access
Author:
Zeng, Yiyang
Area of Honors:
Economics
Degree:
Bachelor of Arts
Document Type:
Thesis
Thesis Supervisors:
  • Ruilin Zhou, Thesis Supervisor
  • Russell Paul Chuderewicz, Honors Advisor
Keywords:
  • credit
  • local government
  • LGFV
  • debt
  • wealth management products
  • bond
  • financial crisis
Abstract:
China has experienced rapid credit expansion since late 2008 as the result of its response to the 2007-2009 global financial crisis. The stimulus plan offered by the central government has significantly encouraged local governments’ borrowing and infrastructure spending. Due to the limited funding sources, the local governments have been heavily dependent on a peculiar financing form called the Local Government Financing Vehicle (LGFV) to help finance their investments. However, despite the short-term positive effects, the expansion of LGFVs has implanted critical risks and vulnerabilities in China’s economic system. The obscure and sophisticated relationships among the local governments, the LGFVs, the commercial banks and other financial institutions, and the investors are unsustainable in the long run. Without active policy reforms, the LGFV financing will bring unbearable debt burdens to local governments in a few years. As a result, measures have to be taken to prevent the financial position of the local governments from further deteriorating and to consolidate the safety of China’s financial system.