Local government financing vehicle

An LGFV is usually an investment company that borrows money to finance real estate development and other local infrastructure projects.

Both the number and the indebtedness of LGFVs have soared in recent years, sparking fears about their inability to repay debts as well as subsequent defaults.

[8] The reforms also mandated that local governments must have balanced budgets and zero debt, which made it much harder for them to secure financing for infrastructure development.

[8] This incentivized local governments to increase land value by developing infrastructure, and LGFVs emerged as a solution to the problem of raising finance for these projects.

The 2007–2008 financial crisis prompted the Chinese government to introduced a 4 trillion yuan ($562 billion) national stimulus plan.

[12] In 2015, the Chinese government introduced a Free Trade Zone in Nansha District, which trialed a new model of land finance to encourage private investment in development.

However, the report detailed widespread resistance within the Chinese Communist Party, leading to various alternative proposals including state-owned housing.

On 23 October, a five-year trial of the proposed tax was announced for select regions with particularly hot property markets, such as Shenzhen, Hangzhou and Hainan.

[18] In April 2023, the government completed a unified real estate registration system, which could enable the property tax to be implemented.

[19] In July 2023 China's state-owned banks began providing loans to LGFVs with a generous repayment period of 25 years, in an attempt to relieve some of the pressure.

[21] In 2023, a study by David Daokui Li concluded that local government debt was 50% higher than previously estimated by the IMF and World Bank.