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Real Estate Finance: LGFVs China SEO Banks Curb Property Loans to Local Government Firms
Finance Mandarin Real Estate Finance Case: LGFVs
Several of China’s largest banks have become more selective about funding real estate projects by local government financing vehicles, concerned that some are taking on too much risk after they replaced private developers as key buyers of land.
China’s biggest lenders are walking a fine line over the property sector, which has been battered by a series of debt defaults, plunging home sales and lower prices in some cities. While banks are being encouraged by regulators to extend credit to stronger developers, they’re also under pressure to keep loan losses contained and avoid financing property firms and LGFVs (地方政府融资平台)that have borrowed excessively.
A Bloomberg Intelligence gauge of China real estate developers extended losses in afternoon trading, dropping 4.3% for the biggest decline in four months. The CSI 300 Real Estate Index closed 2.8% lower. The China Banking and Insurance Regulatory Commission didn’t immediately respond to requests for comment.
LGFVs are a tool for local governments to borrow money without it appearing on their balance sheets. Instead of selling land to cash-strapped developers, local governments are being forced to rely more on purchases by these financing vehicles, effectively selling to themselves, Tianfeng Securities Co. analysts including Sun Binbin wrote in a note Wednesday.
Even with that support, at least 23 of China’s 31 provinces saw a drop in revenue from land sales in 2021, damaging their budgets just as Beijing calls for faster spending to counteract the housing-market slowdown. The bank lending restrictions may further erode real estate land sales, which E-house China Research and Development Institute estimates account for as much as 40% of revenue for some city and provincial governments.
Tighter lending also heightens default risks for LGFVs. They’ve become major borrowers in domestic and offshore credit markets with combined debt loads that have exploded to more than $8 trillion in recent years and whose credit ratings are closely tied to the financial strength of local governments.
LGFVs have stepped up purchases of land parcels as cash-strapped developers like China Evergrande Group hoard cash, supporting a slumping market. A major drop in land sales would bode ill for the world’s second-largest economy, which slowed in the third quarter as the property and construction sectors shrank.
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