>>REAL-TIME UPDATES IN THE WIRE. CLICK HERE<<<
China is stepping up restrictions on financing to local government financing vehicles (LGFVs) to mitigate risks from hidden debt, according to state-owned media including the Securities Times.
Several banks and insurers are connecting their systems with a platform of the Ministry of Finance that monitors liability and expenditure of LGFVs, the newspaper said, citing industry sources.
In future, banks and insurance companies will need to check the platform before providing any funding to local government financing vehicles and they will refrain from providing fresh liquidity to LGFVs that enjoy implicit guarantees from local governments, and will prevent hidden debts from increasing, the report said.
Some projects backed by local governments have already been halted after failing to obtain bank loans due to tighter scrutiny, it said.
A person working for a trust fund said that “one of our key projects was not approved because the sponsor was found to have hidden debt risks. According to the current rules, the financing must be approved by the local government before financial institutions provide financing.”
Industry insiders say that, previously, there were some trust products designed to provide funding from some particular local government financing vehicles, but under the new rules, the approval of the type of products decline significantly.
Local governments have been under pressure to boost economic growth through infrastructure spending using funding via LGFVs, but default risks have raised jitters in financial markets as Beijing has signalled it will allow some heavily-indebted LGFVs to fail.
In a new notice widely circulating online, the China Banking and Insurance Regulatory Commission (CBIRC) and Ministry of Finance recently stressed that banking and insurance institutions must not increase the hidden debts of local governments.
The “Guiding Opinions for Banking and Insurance Institutions to Preventing and Resolving Hidden Debt Risks of Local Governments”, or the so-called Circular 15, noted that financial institutions should not add new hidden debts to local governments.
Banking and insurance institutions must understand local government financing institutions’ debt and medium and long-term expenditures before providing finance, it said.
The CBIRC also issued a separate document providing guidance for local government debt risk mitigation, in which banking and insurance companies will not be allowed to provide working capital loans or financing for special bond issuance.
In order to combat rising debt, Circular 15 also requires local banking and insurance regulators create emergency risk response plans to resolve hidden debts.
Furthermore, the Ministry of Finance issued the “Local Government Special Bond Project Fund Performance Management Measures” in July to further regulate the use of funds and prevent debt risks.
Local governments’ special purpose bonds are required to be linked to performance targets for the related bond projects, according to the rules. Project supervisors must carry out a performance evaluation before obtaining authorization to issue the special purpose bonds.
The aim of the new regulations is to improve the quality of local government infrastructure projects and to improve capital efficiency, said the ministry, after government auditing found that many special bonds have been misused.
Public data shows that China’s outstanding local government debts stood at 25.7 trillion yuan ($3.97 trillion) at the end of 2020, but LGFVs have accumulated massive hidden debt that threatens financial stability, analysts say.
Nomura estimated in a note in April that local government hidden debts reached 45 trillion yuan at the end of last year.
The National Development and Reform Commission (NDRC), China’s top economic planner, said in March that it would conduct strict inspections on increases in hidden local government debts, as well as take “proactive and prudent” steps to address existing hidden debts.
Data from China Chengxin International Credit Rating Co., LTD, China’s total outstanding LGFV loans stood at a new record high of 9.15 trillion yuan at the end of 2020.
Already, local government bond issuance rose in the first half of 2021 and the provinces with the largest urban investment bond issuance in 2021 include Jiangsu, Zhejiang, Shandong, Sichuan, and Hunan.