Local-government bond issuers on the mainland face judgment day as authorities decide which debt they will or won't support. Borrowing costs soared by a record amount last month before yesterday's deadline for classifying liabilities, on speculation some local government financing vehicles will lose government support after the finance ministry starts reviewing regional authorities' debt reports. Yield premiums on one-year AA notes, the most common ranking for such issuers, jumped a record 98 basis points in December. Premier Li Keqiang has stepped up curbs on local borrowings just as LGFVs prepare to repay 558.7 billion yuan (HK$704.3 billion) of bonds this year amid economic growth that's set for the slowest pace in more than two decades. The yield on the 2018 notes of Xinjiang Shihezi Development Zone Economic Construction, a financing arm in a northwestern city with 620,000 people, climbed a record 63 basis points in December. "LGFV bonds that don't get classified as local government debt will lose government guarantees and their credit risks will be re-priced," said Huo Zhihui, an analyst at China Credit Rating in Beijing. "Those that get counted as local government debt will get definitive government support." Provinces were required to submit reports classifying all local borrowings within their borders including those of LGFVs as either government debt or not by yesterday, according to a finance ministry statement in October. The announcement did not specify further steps after the reports. The market expectation is that the central government may release aggregate local debt figures, said Zhang Li, a bond analyst at Guotai Junan Securities. There may not be any announcements on particular LGFV debt classifications, he said. Local-government debt swelled to 17.9 trillion yuan as of June 2013, compared with 10.7 trillion yuan at the end of 2010, according to data compiled by the National Audit Office. The central government is encouraging cities to raise funds for sewage, road and housing through more transparent means including a trial municipal bond market. Local authorities set up thousands of funding units after a 1994 budget law barred them from issuing notes directly. The muni programme is positive for regional and local security markets, according to a report from Moody's Investors Service on December 31. Some LGFVs have cancelled offerings in the past month. Changzhou Tianning Construction Development in the eastern province of Jiangsu said on December 12 it would not go ahead with a 1.2 billion yuan planned offering after city authorities withdrew backing for the debt. On December 17, Urumqi State-Owned Asset Investment in the northwestern province of Xinjiang halted a 1 billion yuan sale after the local government revoked support. "LGFVs are facing a tough financing environment because the government is cutting reliance on them," said Huo. "We can't exclude the possibility there may be bond defaults by some lower-level governments' LGFVs or some from regions that have difficulty raising money." Primary market prices have shown investor aversion to securities from LGFVs in smaller jurisdictions and preference for notes from the highest-level administrative units including provinces and autonomous regions. Shandong Boxing County Xinda Construction Investment Development, a AA-plus rated county-level LGFV, sold one billion yuan of seven-year bonds at 8 per cent on December 19. Jilin Provincial Group, a similarly rated provincial LGFV, issued two billion yuan of bonds at the lower rate of 5.95 per cent on December 25. "Lower-level government bonds will carry more credit risks after LGFVs lose implicit guarantees," said Qiu Xinhong, a money manager in Shenzhen at First State Cinda Fund Management. "We will shun bonds issued by city or county-level local government financing vehicles." Local government financing vehicles sold 288.83 billion yuan of notes in the fourth quarter, the least in 2014. "Differentiation between the bonds of provincial LGFVs and city or county-level LGFVs will widen," said Zhang. "Lower-level governments, cities or counties may find it very difficult to raise money." Liabilities in the counties soared 77 per cent from December 2010, outpacing the 62 per cent increase for provinces, according to audit bureau data. Nomura estimates total local government borrowings may have amounted to 24 trillion yuan at the end of 2013.