Local-government financing vehicles are one of China’s oddest financial innovations
WHEN OFFICIALS in the southern city of Liuzhou began a routine auction of parcels of land in June, they found few takers. Only one of five plots received a bid; the rest went unsold. As in many cities across China, a downturn in the property market has meant less demand for the land on which apartment towers are built.
LGFVs are one of China’s oddest financial innovations. In the mid-1990s the central government implemented budget laws to stop local bureaucrats building up massive debts. In response, regional governments crafted LGFVs as a workaround. The vehicles, which number in the thousands, became important drivers of economic growth, helping build bridges, homes and roads.
Many LGFVs make meagre earnings on the bridges, roads and water systems they build. Officials used to be able to make up the shortfall with land-sale revenues, but this is becoming harder. In a round of sales this year for 22 of China’s biggest cities, the premium fetched on parcels was just 4.7% above the government’s reserve price, compared with 16.7% earlier in the year, reckons Enodo Economics, a research firm.
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