Fitch says China’s local government financing vehicles at lower risk of default in 2024

China’s municipalities will see lower default risks at their local government financing vehicles (LGFVs) next year, thanks to a gradual recovery in fiscal revenues and policy support from the central government, analysts said.

LGFVs, which are platform companies set up by local governments to invest in infrastructure and social-welfare projects, will have more capacity to service their debt and fund public-sector projects in 2024 as local government revenues improve, said Sherry Zhao, senior director of international public finance at Fitch Ratings.

An improvement in government revenues will, in turn, be driven by an expected increase in operating income – consisting of items such as tax and fee incomes. This will more than offset a modest decline in capital revenues, which are mainly tied to land concessions, she added.

“Operating revenue has shown a moderate recovery of 8.8 per cent year on year for the first 10 months of 2023, albeit driven mainly by a value -added tax increase due to a low base from tax rebates implemented in 2022,” Zhao said. Transfers from the central government will also help mitigate local and regional governments’ revenue pressures.

However, a recovery in revenues and LGFV-funded projects is likely to vary across regions, Zhao said.

“Economically weaker regions may face a slower recovery and further tightening of infrastructure spending. Regions facing a deteriorating financing environment will also focus on refinancing instead of raising debt to fund new projects.”