China's Shadow Banking: Billion Dollar Loans from Local Governments

Shadow Banking Practices Back on the Agenda

Recently, shadow banking activities in China, particularly in provinces like Shandong, have been attracting attention. Since September, local government-owned industrial investment companies and financing platforms have secured billions of dollars in loans through trust companies and financial leasing firms.

High Interest Rates on Loans

These loans typically carry interest rates of over 8 percent, which far exceeds the borrowing costs in the bond market. Financial institutions involved in China's shadow banking system are turning to these high-interest loans due to the difficulties in finding assets to invest in a low-interest environment.

Local Governments' Borrowing Strategy

Beijing is trying to prevent local governments from accumulating debt through state companies known as LGFVs. As a result of this effort, these companies have limited access to low-cost financing sources. Consequently, investments in the Chinese market have shown a significant decline.

Evaluation from BNP Paribas

Jacqueline Rong, the Chief Economist for China at well-known financial institution BNP Paribas SA, stated, "Platforms in wealthy regions would not have to resort to such expensive funds if financial discipline were not so tight." She also noted that the ongoing campaign to address hidden debt and financial discipline could lead to a significant decline in infrastructure investments.

LGFV Debt Status

Financial analysis company Fitch Ratings estimates that the total debt of LGFVs has exceeded 60 trillion yuan (approximately 8.5 trillion dollars). It emphasizes that 90 percent of this debt consists of bank loans and bonds, while the remaining portion comes from "non-standard borrowings" obtained through shadow banking channels.