China's local government financing arms, and the real estate industry that supports them, have long been viewed as two important drivers of the nation's economy. Now, after years of rapid growth, the property sector has hit the skids, triggering a liquidity crisis for municipal and provincial borrowers that poses risks to the country's financial system.
More than 80% of local government financing vehicles, or LGFVs, do not have enough operating cash to cover interest payments on their debt, according to estimates by Swiss bank UBS. These entities are state-owned companies set up to finance infrastructure projects, including highways and bridges.
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