The Marketization and Transformation of Local Government Financing Vehicles: Evidence from Actual Controllers' Equity Holding of Listed Companies
Liu Jinyu, Ma Qianwen, Li Yimin
China School of Banking and Finance, University of International Business and Economics; School of Management and Economics, The Chinese University of Hong Kong, Shenzhen; Zhonghai Trust Company Limited
Summary:
Local Government Financing Vehicles (LGFVs, or Chengtou platforms) have long played a crucial role in supporting local infrastructure development and economic growth in China. However, with the continuous expansion of municipal corporate bonds (MCBs), the burden of local government implicit debt has become increasingly severe, making the risk resolution of MCBs and the market-oriented transformation of LGFVs a central focus in China's financial stability and development. The 19th National Congress of the Communist Party of China identified "forestalling major financial risks" as one of the three critical battles. Furthermore, the establishment of the Financial Stability and Development Committee of the State Council marked an important step forward for China towards a risk-prevention-oriented regulatory phase of the financial system. Under this policy backdrop, LGFVs urgently need to explore sustainable market-oriented transformation paths. Currently, the reforms of LGFVs in China can be broadly categorized into two approaches. The first approach emphasizes controlling new debt issuance and converting implicit debt into explicit liabilities, thereby restricting the expansion of MCBs. This paper focuses on the second approach: promoting the marketization and transformation of existing LGFVs into independent and self-sustaining entities. The goal is to shift LGFVs from merely financing tools of local governments to commercially viable platforms capable of supporting their debt through stable revenue streams. The transformation of LGFVs can not only effectively alleviate the debt burden of local governments, but also establish sustainable mechanisms for resolving the credit risks of MCBs and promoting local industrial development, thereby reducing fiscal pressure on local governments. This study explores a feasible transformation path from the perspective of LGFVs' actual controllers' equity holdings in listed companies. Using a sample of MCBs issued between 2015 and 2023, this paper investigates whether equity holdings by actual controllers help alleviate investors' concerns over default risks, reduce financing costs, and improve the overall financial condition of LGFVs. Our findings show that equity ownership in listed companies by LGFVs' actual controllers significantly reduces the subsequent issuance spread of MCBs in the primary market. Furthermore, the findings suggest that LGFVs with higher equity holdings of listed companies by their actual controllers exhibit greater cash flow stability, enhancing their ability to meet obligations. More importantly, equity holdings in listed companies enable local governments to better mobilize and integrate resources, foster key industries, and improve their fiscal capacity, thereby establishing a more sustainable path for resolving credit risks of MCBs. This paper contributes to the literature in three main ways. First, the increasingly common cases of LGFV’s actual controllers holding equity in listed companies have not yet been systematically examined by academia. This paper bridges this gap by analyzing the motivations and effects of this path, providing timely insights for policymakers and researchers. Second, we show that the market-oriented transformation of LGFVs enhances not only the pricing performance of MCBs but also the financial resilience and operational capacity of LGFVs, verifying the effectiveness of this path from a fundamental perspective. The results confirm that the motivation behind local governments' equity injections into LGFVs is not merely expanding borrowing capacity. Instead, these actions are more often driven by a long-term strategic vision to reshape the development model of LGFVs and to optimize local industrial structures. Third, local governments not only face the urgent task of addressing existing debt burdens but also have to confront the fundamental question of the future direction of LGFVs. This paper contributes to guiding local governments beyond the traditional mindset of rolling over debt through new borrowing or relying on land sales for repayment. This study provides valuable insights by offering an effective solution to the transformation challenges of traditional LGFVs under the frameworks of “market-oriented debt resolution” and “asset-based debt resolution”. This paper also encourages local governments to recognize the dynamic relationship between assets and liabilities and adopt a more scientific and development-oriented approach in debt management.
刘津宇, 马千雯, 李奕旻. 融资平台转型:平台实控人持股上市公司的证据[J]. 金融研究, 2025, 536(2): 150-167.
Liu Jinyu, Ma Qianwen, Li Yimin. The Marketization and Transformation of Local Government Financing Vehicles: Evidence from Actual Controllers' Equity Holding of Listed Companies. Journal of Financial Research, 2025, 536(2): 150-167.
