Regional governments across China are evading borrowing limits by transferring assets on to the books of local investment companies to lower their official debt-to-asset ratios, according to executives and officials.

The practice has allowed local government finance vehicles to raise more money for infrastructure and other construction projects. But analysts warn that many of the assets are of poor quality, setting the stage for a surge in bad debts after a wave of bond defaults at government-backed companies in recent weeks. 

“Many of our assets do not generate much economic value,” Liu Pengfei, president of Taiyuan Longcheng Development Investment, an LGFV in the northern city of Taiyuan, said at an investment conference last month. “The Taiyuan government gave them to us so we can meet [the debt-to-asset] requirements set by our creditor banks and bond investors.”