China May Bar New Borrowing by High-Debt, High-Risk Local Governments
What’s new: China’s regulators are reviewing local government financing vehicles (LGFVs) and will ban those with the highest hidden debt risk from issuing new debt unless it’s for repaying old debt, according to several people close to regulators.
The guidelines initially will apply to LGFV debt sold on two stock exchanges and are expected to eventually apply to the interbank bond market, which is regulated by the National Association of Financial Market Institutional Investors (NAFMII) and accounts for 90% of the trading volume of onshore debt, Caixin learned.
The interbank bond market hasn’t implemented the new guidelines partly because sentiment hasn’t fully recovered from the impact of a series of bond defaults by state-owned enterprises, Caixin learned. Those shocks included the 1 billion yuan ($154 million) bond default by coal mine operator Yongcheng Coal and Electricity Holding Group Co. Ltd. in November that set off a chain reaction in the bond market.
The Finance Ministry has not made public the evaluation standard and results. Caixin learned from sources that local governments with total debt of less than 120% of their fiscal revenue are evaluated as green regions, while those above 300% are classified as red regions.
The background: In July 2019, The Ministry of Finance, the central bank, the National Development and Reform Commission, the top banking and securities regulators and other ministries jointly issued a document providing guidelines on how LGFVs can take out new borrowings to repay old debt or roll over debt.
There have been no official data on local governments’ hidden debt, but some research institutes have estimated that such unofficial liabilities of most provinces could be more than two times their on-the-books borrowing, which stood at nearly 18.4 trillion yuan ($2.68 trillion) at the end of 2018.
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