China’s Local-Finance Cleanup Opens New Chapter With State Firms

China’s Local-Finance Cleanup Opens New Chapter With State Firms

In a groundbreaking move, China has authorized two state-owned enterprises to raise a total of 500 billion yuan to stabilize the economy and expand investment. This marks a significant shift towards central government financing vehicles (CGFVs) as a new tool to manage financial risks previously associated with local government financing vehicles (LGFVs).

The use of CGFVs allows for greater oversight by national authorities, addressing the lack of transparency and low returns on investment that posed a danger to the financial system under LGFVs. With the backing of Beijing, these state firms, China Reform Holdings Corp. and China Chengtong Holdings Group, enjoy lower financing costs and have healthier balance sheets, giving them greater scope to borrow and invest.

Experts believe that CGFVs could play a crucial role in supporting economic growth and driving fiscal stimulus next year. The bond proceeds from these firms will be invested in major national projects focused on technology, strategic emerging industries, and government-led initiatives like the cash-for-clunkers program.

The potential impact of CGFVs is significant, with projections suggesting they could drive up to 1 trillion yuan in total equipment upgrading investment and boost fixed asset investment growth by as much as two percentage points next year. While Chengtong and China Reform are currently the only two state capital management companies among China’s central SOEs, their success may pave the way for similar functions in other state firms.

However, challenges remain as more central SOEs may be tasked with borrowing to fund public initiatives that may not generate enough profit to cover the debt. Despite the potential risks, the use of CGFVs represents a new chapter in China’s efforts to manage financial risks and support economic growth.

This article was generated from an automated news agency feed without modifications to text.
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