China's New Crackdown on Regional Debt May Curb Bond Sales

(Bloomberg) -- Local government financial vehicles in China have started to exclude some data in bond prospectuses, and S&P Global Ratings said the changes suggest that such firms may have more difficulty raising funds offshore.

The finance ministry said last month that LGFVs mustn’t disclose fiscal and borrowing figures of local governments, which would imply support from the authorities, in bond sale documents including prospectuses. The National Association of Financial Market Institutional Investors, a Chinese local bond regulator, has also given underwriters such guidance, according to people familiar with the matter.

“The intention is to untangle any association between government financial capacity to support and LGFVs’ debt repayment in the bond documents,” said Christopher Lee, managing director of corporate ratings at S&P Global Ratings in Hong Kong. He said that the reduced transparency may make foreign investors more cautious, and “the offshore LGFV bond sales may stagnate for a while.”

The units that amassed record debt in the borrowing-and-building binge after the global financial crisis have faced increasing strains as President Xi Jinping stepped up efforts to rein in financial risks. Investors are concerned that regional authorities will refrain from bailing out LGFVs when they run into trouble. Pacific Investment Management Co. and Aberdeen Standard Investments both said the first bond default by such firms is possible this year.

China's New Crackdown on Regional Debt May Curb Bond Sales

LGFVs sold $3.8 billion of offshore bonds in the first quarter, compared with $1.9 billion in the same period of last year, according to data compiled by Bloomberg. They are facing $5.4 billion of bond maturities in the overseas market for the rest of this year and a record $11.2 billion in 2019.

The NAFMII gave local underwriters guidance on disclosure last week, according to the people familiar with the matter, who asked not to be identified because the information hasn’t been made public. It also required underwriters to strengthen their due diligence work for LGFV bonds, said the people.

LGFVs appear to have started following that NAFMII order, based on onshore prospectuses released this week. A NAFMII official wasn’t able to immediately comment. The regulator oversees corporate bonds offered in interbank market.

For example, Jiangsu Hanrui Investment Holding Co., a financing vehicle of Zhenjiang city in the eastern Jiangsu province, included borrowing figures for the municipality when it previously released a prospectus in March before the new regulations came out. The documents posted on the Chinamoney website Monday didn’t include any debt numbers for the city.

Qingdao City Construction Investment Group Co., another LGFV based in Shandong province, also showed similar changes in its prospectus released Monday.

©2018 Bloomberg L.P.