China tightens rules for local government debt sales

The central government has tightened its grip over bond sales by local government financing vehicles (LGFV) as it strives to contain the risks of the sector.

The financing companies, set up by local governments to fund projects, would undergo extra scrutiny if their debt-asset ratio exceeded 65 per cent and the debt to be issued was rated below AA-plus, sources said, citing a notice from the National Development and Reform Commission earlier this month.

The nation's top economic planner approves LGFVs' bond sales. It decided to ban the sale of LGFV debt that was rated lower than AA-minus but would continue to allow the sale of bonds rated above AA-plus, the sources added.

The move is the latest attempt by the authorities to manage the risks of LGFV borrowings, after local government debt swelled to 16.5 trillion yuan (HK$20.8 trillion) at the end of last year.

That estimate, by UBS Securities, is equal to 32 per cent of gross domestic product.

"The NDRC's measures are aimed at better risk management of debt issuance of the financing vehicles as local governments are faced with mounting liabilities," said Fan Wei, an analyst at Beijing-based Hongyuan Securities. "I think it will make the bond market healthier."