context: An important part of curbing relentless local government borrowing is to disassociate local governments and their financing vehicles (LGFVs)—incorporated entities (mostly) wholly owned by local State-owned Asset Supervision and Administration Committees (SASAC). This has proven difficult, not least because of parasitical dynamics linking the two: LGFVs, having inherited highly-leveraged state-owned assets with poor prospects, are struggling to stand on their own two feet.

Yunnan Capital, an equity investment company wholly owned by Yunnan Provincial Government, delayed repayment of some trust loans for a month. According to the release by Zhongrong International Trust Company (underwriter and manager of these loans), the repayments were delayed because ‘relief capital’ from the Yunnan Government has not passed through the necessary government procedures.

This delay is the first instance of a (former) LGFV default in 2018, notes Caixin. Yunnan Capital, while still owned by the government, officially stopped financing for local government projects in mid-2016, according to the paper; it is now a state-owned investment and asset management company.

Through debt and equity investments, Yunnan Capital has very heavy exposure to underperforming state-owned assets based in Yunnan. According to Everbright Securities research, a significant proportion of its debt holdings rescued deeply indebted local overcapacity SOEs, particularly in coal-related industries. Low quality assets mean that Yunnan Capital has not been able to generate enough operating cash flow, and is forced to rely on new financing to fulfill liquidity requirements, notes Caixin.