(Yicai) Jan. 8 — Chinese regulators are expected to intervene in local governments’ rising off-balance-sheet borrowing with very high interest rates, according to credit professionals.
Raising money via local government financing vehicles is a common way to fund urban infrastructure projects in China but the central government has been trying to curb such off-budget borrowing in recent years due to the low transparency of such debt instruments.
In the past year, regions were relatively active in issuing short-term offshore bonds due in less than one year via LGFVs as raising money onshore became more regulated. However, the National Development and Reform Commission’s new rules, implemented last February, do not restrict offshore bonds with maturities shorter than one year, insiders said to Yicai.
Some LGFVs started to issue bonds due in 364 days or less offshore to raise money to take advantage of the regulatory loopholes, Wang Lei, director of S&P Global’s industrial and commercial business ratings division in China, told Yicai.
Chinese LGFVs issued over 230 muni bonds offshore last year, raising USD25.4 billion, according to public data. Over two-thirds of them had a maturity of less than one year, with an average interest rate exceeding 6.5 percent, compared to a domestic average of about 4.2 percent.
LGFVs’ offshore bonds with high yields do not conform to the central government’s target of reducing financing costs for local governments, Wang said, adding that the central government is expected to expand its regulatory oversight.
For example, a LGFV from Shandong province’s capital city Jinan offered a nominal rate of 7 percent for a 364-day yuan-denominated bond it issued in the Hong Kong Special Administrative Region last month, per Wang. The figure is much higher than the nominal rate of 4.88 percent that the same LGFV offered for a three-year bond issued on the Shanghai Stock Exchange last August.
Editors: Tang Shihua, Emmi Laine
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