The Rise and Fall of LGFVs - by Jonathon P Sine
In this essay, the first of a two part series, we will tell the story of China’s LGFVs: that special type of state-owned enterprise (SOE) behind China’s infrastructure building bonanza. Along the way, we will look at the political and economic processes in China that facilitated their rise, and assess what we know and what we don’t know about them. It is a very long and comprehensive post, and no offense will be taken should the reader choose to treat it as a source for reference material. Efforts were made, however, to make it an enjoyable read. A follow on part two will look to the future of LGFVs and China’s political and economic system.
Let us begin with data. Today, there are nearly 12,000 LGFVs in China, 3,000 of which publicly disclose financials. 1 Collectively, they are gargantuan. As of 2020, according to bottom-up surveys of LGFV financials, aggregated assets and liabilities equal 120% and 75% of China’s GDP, respectively.
LGFV’s financial situation is, to put it frankly, very bad. In aggregate, earnings (before interest, taxes, and depreciation, i.e., EBITDA) do not cover even their interest payments. Including government subsidies only occasionally pushes the interest coverage ratio above one. Moreover, the average borrowing cost for LGFVs, 5% or so, far outpaces their 1% return on assets, posing obvious sustainability problems. 2
