Feng, Y; Wu, F; Zhang, F; (2022) The development of local government financial vehicles in China: A case study of Jiaxing Chengtou. Land Use Policy , 112 , Article 104793. 10.1016/j.landusepol.2020.104793.

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Abstract

Financial intermediaries have been widely used in urban development. Since the global financial crisis, it has been an urgent task to understand their operation and implications for financial risks. This paper examines emerging local government financial vehicles (LGFVs) in China. We review their history, current status and underlying financial mechanisms. Confronting the global financial crisis, China has taken a stimulus plan to invest four-trillion Yuan in urban development to stimulate the economy. The plan has been largely fulfilled by the LGFVs. This paper investigates the case of Jiaxing City Construction Investment Corporation (Jiaxing Chengtou), which plays a role of LGFVs. We find that it mainly uses bank loans and bonds to finance land and infrastructure development. To borrow from the capital market, Jiaxing Chengtou collateralizes allocated state-owned land and enhances credits by build and transfer protocols with the city government. However, the enterprise did not manage to pay back its loans, which has led to further borrowing. Due to the central government’s control, Jiaxing Chengtou has been nominally detached from the municipal government since 2012, but it maintains a financial role. It has been re-packaged with other LGFVs to access foreign bond markets. The paper reveals how LGFVs act as financial conduits to connect local governments with the financial market in China.

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