Chinese regulators have ordered local government entities to stop issuing offshore bonds with a 364-day duration.
The move shuts a regulatory loophole that had allowed heavily indebted local government funding vehicles (LGFVs) to increase borrowing further last year, sources have revealed.
LGFVs were set up by Chinese provincial and local governments to fund infrastructure, and their combined debt has ballooned to roughly $9 trillion, posing a major risk to a slowing economy.
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China has rolled out several measures to resolve local government debt risks, and new issuance of LGFV debt is tightly regulated.
The latest guidance comes after a rush by many LGFVs to raise 364-day offshore bonds, seemingly in a bid to circumvent regulation that requires them to seek approval for offshore borrowings with maturities longer than a year.
LGFVs have found onshore financing challenging, and they also have to seek approval from regulators such as the National Development and Reform Commission (NDRC) to issue offshore debt, unless the tenor of the bond is less than a year.
The NDRC published regulations on medium and long-term foreign debt in January 2023, but said offshore debt financing with maturities of less than one year was not subject to approval.
27 LGFV bonds took advantage of loophole
That loophole led to 27 offshore LGFV bonds with a duration of 364 days being issued in 2023, most of them after October and with yields over 6%, data from TianFeng Securities showed.
“The issuance of 364-day offshore LGFV bonds has been stopped,” one source at a brokerage that is familiar with LGFV issuance said.
“Such bonds were not regulated and were obviously contrary to the direction of government’s debt resolving efforts.”
Shandong Province issued the most 364-day bonds, with 12 issues that raised more than $1 billion.
“Such offshore bonds certainly came with risks. It’s not realistic that you can easily get double-digit yields on these bonds,” another source at a private fund said.
The NDRC and currency regulator State Administration of Foreign Exchange (SAFE) did not immediately reply to Reuters’ requests for comments.
- Reuters with additional editing by Jim Pollard
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