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CBRC Tells Banks to Limit Investment in Local Government Bonds

China’s banking regulator told lenders to be “cautious” when investing in bonds issued by local government financing vehicles as policy makers seek to rein in local borrowing.

The China Banking Regulatory Commission has capped at end-2012 levels LGFV loans by banks, which are banned from providing guarantees to the entities’ bonds, Cao Guoqiang, Vice President of China Citic Bank Corp., said at a teleconference.

Total local government debt may have risen 13 percent over two years to 12.1 trillion yuan ($1.98 trillion) as of December 2012, Moody’s Corp. estimated in June, citing a National Audit Office review. That adds to risks that the central government will be forced to bail out local authorities. Banks had advanced 9.7 trillion yuan of loans to these financing vehicles as of June 30, according to the banking regulator.

Local governments set up more than 10,000 so-called LGFVs to fund projects such as roads, sewage plants and subways after they were barred from directly selling bonds under a 1994 budget law. Former Finance Minister Xiang Huaicheng said April 6 that local governments’ combined debt may have exceeded 20 trillion yuan.

A 4 trillion-yuan stimulus plan during the 2008-09 financial crisis swelled loans to companies, which they roll over or refinance with note sales.

The National Development and Reform Commission’s provincial branches will take charge of preliminary reviews of bond sales by unlisted companies, the China Securities Journal reported today. The so-called “enterprise bonds” are overwhelmingly from local-government financing vehicles, the report said.

The NDRC in April ordered greater scrutiny of debt sale applications from some LGFVs with credit ratings below AA+, according to a May 22 statement. The agency issued a separate notice in the same month to carry out a nationwide financial inspection of enterprises that have filed bond sale applications.

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