PBOC sets sights on 'zombie' financing vehicles

The People's Bank of China said in an online statement on Thursday that it will "exhaustively clean up" local government financing vehicles that "have poor credit, ambiguous functions and unsustainable financial conditions". [Photo / Provided to China Daily]

The People's Bank of China has reiterated its resolve to root out "zombie" local government financing vehicles this year and ensure that urbanization funding moves through standard market channels.

The central bank said in an online statement on Thursday that it will "exhaustively clean up" local government financing vehicles that "have poor credit, ambiguous functions and unsustainable financial conditions".

These vehicles are separate agencies created by local governments to finance massive spending on highways, stadiums or public works. Their creation followed the 2008 stimulus program that helped China rebound quickly from the global financial crisis and subsequent economic downturn.

But analysts now believe that many LGFVs can't cover their debt payments. These entities were set up in haste, without any thought given to profitability, and the projects they backed don't generate sufficient revenue to make loan payments.

"The PBOC statement is more symbolic than substantive, and it's not the first time it said it will clean up LGFVs," said Li Yan, a senior analyst at China Chengxin International Credit Rating Co Ltd. "I assume specific rules will follow the pledge."

The central bank's statement was in line with that of the National Development and Reform Commission, which on Dec 31 said it will allow debt rollovers in an effort to avoid defaults by LGFVs.

Both statements were seen as confirming the belief that a growing number of LGFVs face repayment difficulties and will have to roll over their debt.

The NDRC's announcement came just one day after the National Audit Office's disclosure that China's local government debt and contingent liabilities had surged to 17.89 trillion yuan ($2.93 trillion) by the end of last June. That figure represented a 67 percent rise from previous audit results from the end of 2010.

Debt raised by LGFVs accounted for 39 percent of total debts, the NAO said.