China has embraced the idea of defaults imposing some discipline on debtors in its bond market. And some of the most troubled debtors are local governments' financing vehicles. So an LGFV default has long seemed on the cards. But it just isn't happening.
Moody's Investors Service thought the first one might come in 2017. Almost two years later, there have been some close calls — including with a late payment by a unit owned by Qinghai province on a dollar bond last month that caused ripples through the investment community — but no default.
What it suggests is China's leadership isn't prepared for a borrower with a regional authority's imprimatur to renege on its principal, triggering higher borrowing costs across a swath of the world's third-largest bond market. Stepping in with official assistance when needed will help local authorities sustain the development spending key to holding up national growth. The cost may be an even bigger future reckoning with bad debt.