China’s local governments may have accumulated 40 trillion yuan ($5.8 trillion) of off-balance sheet debt, or even more, suggesting further defaults are in store, according to S&P Global Ratings.

“The potential amount of debt is an iceberg with titanic credit risks,” S&P credit analysts led by Gloria Lu wrote in a report Tuesday. Much of the build-up relates to local government financing vehicles, which don’t necessarily have the full financial backing of local governments themselves.

With the national economy slowing, and a Beijing-set quota for issuance of local-government bonds not being enough to fund infrastructure projects to support regional growth, authorities across the country have resorted to LGFVs to raise financing, according to S&P. That’s left LGFVs “walking a tightrope” between deleveraging and transforming their businesses into more typical state-owned enterprises, the S&P analysts said.

Rising vulnerabilities among LGFVs occur against a backdrop of a record pace of defaults this year in China, which has sought to roll back a decades-old practice of implicit guarantees for debt.

https://www.bloomberg.com/news/articles/2018-10-16/china-may-have-5-8-trillion-in-hidden-debt-with-titanic-risks