At the end of August, 43 LGFVs – including parent companies and subsidiaries – had failed to redeem maturing commercial paper at least three times over the previous six months, analysts at Lianhe Credit Investment Consulting Co Ltd, a consultancy, wrote in a note last week based on data from the Shanghai Commercial Paper Exchange. That’s up from 27 at the end of July.

LGFVs are set up by local authorities to raise money for infrastructure and public welfare projects. But tighter oversight of their borrowings on the one hand, and growing pressure to find more money to help local authorities boost investment on the other, has left them increasingly strapped for cash.

Nineteen of the delinquent LGFVs have also issued bonds that are trading on the domestic interbank market or stock exchanges. At the end of August, they owed a combined 886 million yuan (US$126.4 million) in commercial paper, up from 10 that owed 232 million yuan at the end of July, analysts at brokerage Huaan Securities Co Ltd wrote in a note on Sept 6.

Commercial paper, known in China as commercial acceptance bills, is a kind of short-term IOU that big companies offer to their suppliers in lieu of cash payment and which needs to be redeemed within a year. Many analysts regard the debt instrument – which pays interest and can be traded among companies – as an off-balance-sheet liability for the issuer and failing to repay is seen as an early sign that the company is facing a liquidity crunch.

Some LGFVs may not be facing a cash squeeze but are victims of technical issues such as the low efficiency of the bank payment system, analysts at TruValue, an asset management firm, wrote in a Friday note.

One LGFV in Xuzhou, a city in Jiangsu province, said it failed to redeem its commercial paper on time due to travel restrictions to control a local Covid-19 outbreak, the analysts wrote, although they added that it did eventually make the payment.

Nevertheless, financial pressure on LGFVs is growing for a variety of reasons.

Since last year, an increasing number of local governments have been trying to fill the hole in their budgets created by the collapse in the property market, which has left private developers unwilling or unable to buy land-use rights at auction. LGFVs have been prodded to step in to bid for the land, but it’s left many already cash-strapped vehicles struggling to find the money because they are so heavily indebted.

Many projects funded by LGFVs are for public welfare and thus have not generated enough cash to allow the vehicles to repay their debts, forcing them to refinance at higher interest rates. In the first half of 2022, 3,346 bonds were issued by LGFVs, and the proceeds from 84% of them were used to refinance existing debt, analysts at Huaan Securities wrote in a note in July.

It has also become more difficult and costly for many LGFVs to sell bonds and get bank loans as the creditworthiness of the local governments that control them deteriorates.

“We don’t look at whether the projects the LGFVs are going to fund will lose money or not,” an employee with the asset management department of an insurance company told Caixin. “We only judge whether the local government can provide sufficient support.”