May 7 (Bloomberg) -- China has ordered greater scrutiny of bond sales by local government finance vehicles with higher levels of debt, three people with knowledge of the matter said.
The National Development and Reform Commission, which approves bond sales by companies that local governments set up to finance projects, will more strictly review applications for debt with credit ratings below AA+ sold by issuers with debt-to-asset ratios exceeding 65 percent, said the people. They asked not to be identified due to lack of authorization to speak publicly about the order.
China’s central government has sought to rein in borrowing by local governments on concerns that slowing economic growth could result in some financing vehicles being unable to repay debt, saddling banks with bad loans. The ruling Communist Party’s Politburo Standing Committee, the nation’s top decision-making body, said last month the country must guard against financial risks as growth moderates.
“The government remains keen to control the risks of the financing vehicles, and that’s part of why we’re not seeing very active infrastructure investments,” said Lan Shen, a Shanghai-based economist at Standard Chartered Plc. “If the economy really slows down, it can’t be ruled out that problems will show up in some regions.”
Local authorities need to pay about 1 trillion yuan ($162.5 billion) a year in interest alone on their 15 trillion yuan of outstanding debts, including bank loans and bonds, she added, citing the bank’s own estimates.
The NDRC, China’s top economic planning agency, will also tighten approval for other companies seeking to sell bonds with credit ratings below AA+ if the issuers have debt-to-asset ratios exceeding 75 percent, the people said.
The agency shares oversight of China’s debt markets with the People’s Bank of China and the China Securities Regulatory Commission. The NDRC is responsible for approving bond sales by companies that aren’t publicly traded. About 63 percent of such bonds sold in China last year had credit ratings below AA+, according to a report by the National Association Financial Market Institutional Investors.
China’s central bank asked participants in the $3.7 trillion interbank bond market to examine trading histories as it cracks down on short-term transactions designed to bypass month-end risks evaluations, two people with knowledge of the matter said last month.
The central bank estimated in 2011 that local governments, barred from directly selling bonds or taking bank loans, had set up more than 10,000 financing arms to fund the construction of roads, bridges and sewage plants. The nation’s provinces and cities may have more than 20 trillion yuan ($3.25 trillion) of debt, former Finance Minister Xiang Huaicheng said last month.
Separately, stricter approval criteria will also be applied to industries the agency identifies as having overcapacity, or as being heavy polluters or high users of energy, the people with knowledge of the matter said.
The NDRC will support bond sales that finance the continued construction of infrastructure identified by the government as key state projects, the people said. Support will also be given for issuances funding the building of affordable housing and projects supporting agricultural production.
Bond sales by companies with AAA credit ratings will be supported, as will sales of debt backed by collateral from issuers with ratings of AA+ and above, the people said.
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