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Banking & finance
BusinessBanking & Finance

Top Chinese banks offer 25-year loans to LGFVs to avert credit crunch in US$9 trillion debt market

  • Banks like ICBC and China Construction Bank have recently started extending loans to local government financing vehicles that mature in 25 years, sources said
  • Slumping land sales and massive pandemic-related expenditures have weakened the ability of local governments to keep LGFVs afloat

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A dragon boat parade on the Jinjiang River in Tongren city, Guizhou province. The poor southwestern Chinese province reached an agreement with banks late last year to extend loans of about US$2.3 billion by 20 years. Photo: Xinhua
Bloomberg
China’s biggest state banks are offering local government financing vehicles (LGFVs) loans with ultra-long maturities and temporary interest relief to prevent a credit crunch amid growing tension in the US$9 trillion debt market, according to people familiar with the matter.
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Banks including Industrial and Commercial Bank of China and China Construction Bank have started to ramp up loans that mature in 25 years, instead of the prevailing 10-year tenor for most corporate lending, to qualified LGFVs with high creditworthiness in recent months, said the people, asking not to be identified discussing a private matter.

Some came with waivers on any interest or principal payments in the first four years, though the interest will be accrued for later, the people said. The total size of the longer-term loans to LGFVs could not immediately be determined.

The move comes at a time when concerns over financial fragility in the world’s second largest economy – particularly among China’s local governments – have made policymakers wary of repeating mega-stimulus packages of previous downturns. Instead they have turned to credit expansion to avert potential defaults at the government level, where a broad measure of official borrowing has swollen to some US$23 trillion, according to estimates from Goldman Sachs.
Top Chinese banks like ICBC are extending loans to qualified LGFVs with high creditworthiness. Photo: Bloomberg
Top Chinese banks like ICBC are extending loans to qualified LGFVs with high creditworthiness. Photo: Bloomberg

Media representatives of Beijing-based ICBC and Construction Bank did not respond to requests for comment.

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There is also increasing focus on the US$9 trillion debt market for LGFVs. While none has defaulted on a public bond, a recent last-minute payoff of a note raised fresh concerns about the sector’s debt-servicing abilities.

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