How Local Government Financing Vehicles Can Lay the Foundation for Market-Oriented TransformationBased on Measuring the Liquidity and Default Risk of LGFV Bonds

Due to the heavy burden of local financing and infrastructure construction tasks, local government financing vehicles (LGFVs) have accumulated significant outstanding debts. Some of these debts, characterized by high borrowing costs, have resulted in substantial interest payment pressures, posing severe short-term liquidity risks and long-term challenges to sustainable development. This paper aims to explore how LGFVs can establish a solid foundation for market-oriented transformation while effectively addressing existing local debt and the default risks of LGFV bonds. By adopting multidimensional indicators to represent liquidity, as well as incorporating bond market adaptability, local government fiscal conditions, LGFV bond characteristics, and local macroeconomic factors, the study examines the relationship between default risk and bond liquidity for LGFVs. Regression analysis reveals that bond liquidity, local government fiscal health, and LGFV bond characteristics all significantly influence the default risk of LGFV bonds, with bond liquidity exerting a pronounced negative impact on default risk. A reduction in the bid-ask spread enhances asset liquidity, thereby mitigating the default risk of LGFV bonds. By analyzing the current state and causes of LGFV debt risks and providing a comprehensive measurement of bond liquidity and default risk, this paper proposes critical pathways and strategic recommendations for LGFVs to build a robust foundation for market-oriented transformation, aiming to serve as a reference for the high-quality development of LGFVs.