China’s multi-trillion-dollar ‘time bomb’ imperils global markets: US House

Ratings agencies S&P Global and Moody’s accused of failing to reflect risk posed by mainland’s local government financing vehicles

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Katie Porter, a California Democrat, speaks during a US House Oversight committee hearing in Washington on Wednesday. Photo: SCMP

Published: 5:50am, 27 Jun 2024Updated: 11:00pm, 27 Jun 2024

Ratings agencies S&P Global and Moody’s drew fire at a US congressional hearing on Wednesday for failing to reflect the risk of a multi-trillion-dollar “time bomb” that China’s local government financing vehicles pose for global financial markets.

Grilling witnesses at a House Oversight committee hearing, California Democrat Katie Porter won praise from witnesses called by the panel’s Republicans, including Washington’s former World Bank representative Erik Bethel, for highlighting a challenge that China’s property market downturn has caused for the country’s LGFVs.

These firms borrow on behalf of provinces and municipalities to finance roads, ports, and other infrastructure projects, using leases on land controlled by the government authorities as collateral, Porter said.

This was a risky proposition, she added, given that China’s property prices have been stuck in a steep decline.

Residential buildings in Shanghai on Monday. The Chinese financial hub relaxed the cap on prices for new homes, a tactic the government used to temper the property bubble when values were soaring. Photo: Bloomberg

With property built on the leased land falling in value, Porter explained, the situation was comparable to the global financial crisis of 2007-2008, which was sparked when the value of debt backed by subprime mortgages and other risky assets collapsed.