China tightens rules for bond sales by local governments

The mainland has issued stricter rules for approval of bond sales by local government financing vehicles (LGFVs) amid concerns that some debt-ridden regions risk insolvency and with Beijing determined to deleverage an economy facing growing financial risks.

The National Development and Reform Commission, which oversees note sales by unlisted firms, would not accept applications from units in regions whose outstanding LGFV debt exceeded 8 per cent of annual economic output, sources told Bloomberg.

The move would limit such vehicles' refinancing capabilities as they face a record 486.9 billion yuan (HK$614.6 billion) of bonds due next year.

Beijing announced plans on October 2 to ban local authorities from additional borrowing through the units as Premier Li Keqiang steps up efforts to control financial risks. Most debentures regulated by the commission were LGFV bonds, said Ping An Securities.

"The [commission] is probably trying to curb LGFV bond sales before the new rules banning them take effect," said Shi Lei, head of fixed-income research at Ping An.

"Because some LGFVs in highly leveraged regions may no longer get approval to sell bonds, default risks in their borrowings, especially trust products and accounts payable, will probably rise."