Thanks, interesting. This kind of “nested financing” is commonly used in Western countries. It’s usually called “project finance”. The reason for the nested structure is (at least in the West) not to expand the amount of leverage, but really to give some creditors priority over other creditors. If the loan is made directly to the project, then it is paid directly out of the project. Whereas loans to the parent are repaid by the parent, only after paying off the project loan. So project creditors take priority over parent creditors.

I am not sure what the motivation for the nested structure in China was. But if lenders were prudent and did their proper due diligence, they would “see through” the nested structure and take it into account in deciding how much to lend. At the end of the day, the loans have to be repaid by the project and so lenders would (if they were prudent) not increase the amount they lend simply because of the nested structure.

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Great work, but incomplete,

We see the asset side of local governments' ledgers.

(Brad Setser, for example, claims that Beijing is sitting on $9 trillion in foreign exchange assets, $6 trillion of which is undeclared).

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