Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

This four-letter word for a Chinese bond isn't a curse. Nor is it a security. It's an addiction.

We're talking about LGFVs, shorthand for local government financing vehicles, and their 28 trillion yuan ($4.3 trillion) of debt, increasingly in the form of bonds. The dopers are clients of private banks.

Beijing has known for some time that these IOUs, which raised the funds that helped make China's infrastructure the world's envy, posed a risk to its finances. After all, local governments, which were banned from selling their own paper before 2014, were backstopping the debt. Even a single default would have caused refinancing to dry up, forcing the central government to pick up the tab and putting taxpayers on the hook for all those gleaming bridges to nowhere.

That was then. After three years of swapping short-term regional debt -- including some LGFV borrowings -- with longer-dated municipal bonds, China's finance ministry has reached the shores of safety. Ties were formally severed in October between the government and securities sold by subway operators, utilities and economic zones.

Now, if investors in Hong Kong or Singapore buy the 2019 dollar note of Jiangsu NewHeadline Development Group, their only reward is its junk-bond yield. The company provides construction services to the municipal government of Lianyungang in the eastern province of Jiangsu. S&P Global Ratings cut its rating on the company in April, the first-ever downgrade of LGFV debt, citing the local government’s high debt burden.

So how is this bond doing? Just fine. After an initial scare, the note has soared.

Risk, What Risk?
S&P cut the credit rating on a Lianyungang issuer by one rung to BB in April, the first downgrade for an LGFV. Yields have since fallen just as sharply as they rose
Source: Bloomberg
Note: Zhiyuan Group is the offshore issuer for Jiangsu NewHeadline, an LGFV for Lianyungang municipality in Jiangsu province.

The compensation for swimming without a life jacket in a sub-provincial Chinese bond is less now than what investors can make from a Barclays Bank Plc note maturing around the same time.

It isn't hard to see why wealth managers are pushing their clients toward an issuer in a Chinese province that's notorious for having the most LGFV debt. As Citic Securities Co.'s CLSA unit told investors at its annual conference in Hong Kong this week, Beijing will probably permit a limited number of stressed, near-default and even full-default situations to emerge in the onshore market (which is 98 percent of the total.) But offshore failures are extremely unlikely, even as President Xi Jinping presses on with his deleveraging campaign.

This may be good enough for private-bank clients who can use leverage to soup up the measly yields. But for institutional investors, CLSA recommends investment-grade debt like Yunnan Provincial Investment Holdings Group.

At 3.4 percent, the yield on its 2019 paper is even lower than what Jiangsu NewHeadline is paying, but the operator of Yunnan province's power, tourism, railway, petrochemical and healthcare assets is truly too big to fail -- no matter what the authorities might say. A fund manager making 1.35 percent on two-year U.S. Treasuries may quite safely bet on that.

For the rich, though, a hit isn't a hit unless it's from Jiangsu.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1.  The supply of new paper in offshore markets is now heavily rationed by the National Development and Reform Commission.

To contact the author of this story:
Andy Mukherjee in Hong Kong at

To contact the editor responsible for this story:
Matthew Brooker at