February 12, 2018 / 8:42 AM / in a year

China ramps up pressure on local governments with new bond rules

BEIJING (Reuters) - Beijing stepped up pressure on local governments on Monday to get their finances in order, issuing new rules for companies which are planning to issue debt.

Chinese firms selling bonds must publicly state the funds raised do not add to local government debt and that they are not serving any government financing functions, according to a notice from the country’s top planning agency.

Companies also must not request or accept any type of guarantees from local governments for the debt financing, the National Development and Reform Commission (NDRC) said.

Regulators are trying to get a better handle on the broader systemic risks posed by high local government debt and their often opaque financing.

As part of the clampdown, Chinese authorities are working to separate local governments from financing activities of often closely associated but technically independent companies.

“Credit rating agencies should use company financials and project information in credit ratings work, and cannot link the credit rating of companies with local government credit ratings,” the NDRC said.

In particular, Chinese authorities are looking to stamp out the idea that there are implicit government guarantees for investors in state firms if they get into trouble.

Beijing says the government is not responsible for debt raised by these firms but it is still widely assumed that the government would step in to provide support in the event these firms, known as local government financing vehicles (LGFV), faced repayment issues.

In January, a Yunnan state-owned investment company that defaulted last month on two trust loans has secured financing to repay those loans and is set to get 2 billion yuan in additional equity capital from the provincial government.

The missed payments came amid growing fears that financing vehicles used by local governments throughout China, often for vanity projects that ran up large amounts of debt, may start to default this year.

China’s outstanding local government debt rose 7.5 percent to 16.47 trillion yuan ($2.56 trillion) at the end of 2017 from the previous year, according to Reuters calculations, but remained within the government’s target.

Outstanding corporate debt in China is equal to about 165 percent of GDP, the highest among major economies, and most of that is held by state-owned firms.

Reporting by Beijing Monitoring Desk; Writing by Elias Glenn; Editing by Kim Coghill

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