China growth hopes rest on troubled local government financing vehicles

If the Chinese government is able to reach its economic growth target of 5.5 per cent this year, it will be due in part to retail investors such as Jane Song.

In May, Song invested Rmb200,000 ($29,600) in a fixed-income wealth management product issued by a local government financing vehicle in eastern Shandong province. A financial adviser in Shanghai, she was undeterred by the growing reluctance of bigger investors to back LGFVs, which play a vital role in funding infrastructure development across China.

“If the WMP defaults, the local government will have trouble accessing credit in future,” said Song, who expects to get 8.8 per cent interest on the “medium risk” product. “They are not going to let that happen.”

The scale of the challenge China faces in reaching its annual growth target was underlined on Friday by data showing that the economy expanded just 0.4 per cent year-on-year in the three months to June.

Hitting 5.5 per cent growth for the year will only be possible if LGFVs accelerate construction activity. But the local government vehicles are finding it difficult to borrow from banks and institutional bond investors, and are increasingly being forced to offer retail investors high interest rates to raise cash.

Tapping retail investors directly, some for as little as Rmb50,000 each, is a new departure for LGFVs. They have traditionally raised capital from institutions — mainly banks — or from rich individual investors acting through third…

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