The mainland's bond regulator has stopped approving debt sales by governments below provincial level, underscoring concerns of defaults arising from a flood of bond issues by local government financing vehicles this year.
The National Association of Financial Market Institutional Investors, appointed by the central bank to supervise the interbank bond market, had suspended applications to issue medium-term bills by local governments other than provinces, municipalities, provincial capitals and other specially designated cities, industry sources said.
The suspension, expected to last until the end of next month, was aimed at controlling risk after "shell companies" without any cash flows or assets applied to issue debts on behalf of some local governments, a source close to the association said.
The association was not available for comment yesterday.
Beijing has tightened bank credits to local government financing vehicles after a lending spree in 2008 and 2009 resulted in swelling bad loans.
These vehicles borrow on behalf of local governments as the latter are not allowed to raise debt directly.
The proceeds are then used to fund projects, including roads, railways and airports, to help economic expansion.
Pressured by the economic slowdown this year, Beijing initially encouraged the financial vehicles to raise funds through the country's underdeveloped bond market.
The vehicles have raised 471 billion yuan (HK$584.4 billion) through the issuance of 401 bonds so far this year, surpassing the 425.7 billion yuan raised in the whole of last year, according to statistics provided by Minzu Securities.
"The financing vehicles' ability to repay debts has been declining since 2009, according to the financial reports of 558 such companies," Minzu Securities economist Chen Wei said.
Solvency indicators had continued to deteriorate this year as many local governments were seeing falling revenues from land sales, which meant the pressure to repay debts would be heavier in the future, Chen said.
Local governments announced stimulus packages amounting to more than 10 trillion yuan in July and August, after the economy slowed to a 14-quarter low of 7.6 per cent in the second quarter.
On the heels of those ambitious plans, more than 50 financing vehicles are queuing up to issue bonds.
"Some applicants don't have corporate governance, while some others don't provide authentic information," another source said.
"The association has temporarily shut the door for small cities and counties in order to prevent a default explosion in the future."
The association was set up in 2007 by participants in the country's interbank bond, currency, and gold markets, according to its website.