Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

Speaking of Minsky Moments, People's Bank of China Governor Zhou Xiaochuan is engaged in a tug of war with investors on how to price off-balance-sheet bonds issued by local governments.

Offshore dollar bonds are on fire this year. Chinese issuers have already raised a record $122 billion, and the Ministry of Finance will soon price its first offering in the currency since 2004. Curiously, local-government funding vehicles are missing.

Missing Piece
China's LGFVs are not allowed to issue dollar bonds this year
Source: Bloomberg

Chinese entities seeking to raise debt outside the country need the approval of the National Development and Reform Commission. Beijing is currently trying to choke off funding for the local-government vehicles, aimed at developing projects for which municipalities have insufficient budget. Zhou says they're used "to disguise debts or break quotas."

The shortage has turned LGFV dollar bonds into collectors' items. Over the last three months, the 80 such issues saw spreads narrow to an average of only 2.2 percentage points above U.S. Treasuries, placing them solidly in the investment grade category.

In July, Yinchuan Tonglian Capital Investment Operation Co. raised a $300 million three-year dollar issue at a 3.5 percent coupon, even though it bled $438 million cash last year building infrastructure projects in Ningxia, a northwestern province. There's a similar picture at Changchun Urban Development & Investment Holdings Group Co. Both are rated investment grade.

The big rating companies are going with the flow. According to Moody's Investors Service, Yinchuan Tonglian deserves a Baa3 mark because Beijing will support "the development and stabilization of the northwestern part of China, including Ningxia with its substantial Muslim population." A sort of rice-or-riots equation.

By no means all the securities merit such ratings. The 4,040 onshore and offshore bonds for which Bloomberg has financial data generated $9.7 billion in earnings before interest, taxes, depreciation and amortization in 2016 -- while issuing $168 billion of notes. The median of these securities was backed by a financing vehicle with a net debt-to-Ebitda ratio of 27 times.

Onshore investors perceive LGFVs as simply too big to fail. In October 2014, China published a document, Regulation 43, that aimed to remove local governments' guarantees for LGFV bonds. To date, there has been no default. 

Default Risk? No...
LGFV bonds are priced just like corporate bonds
Source: Bloomberg, ChinaBond
Note: Only shows bonds with AA rating, five-year maturity.

But the chickens are coming home to roost. LGFVs started issuing large quantities of bonds in 2015, and most are due in three to six years. They'll start maturing in 2018, with repayments reaching a peak in 2021. 

Zhou Retiring?
Good timing: LGFVs will start repaying their debt in the coming year
Source: Bloomberg

Perhaps Zhou is eager to retire before the time of reckoning.

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

To contact the author of this story:
Shuli Ren in Hong Kong at

To contact the editor responsible for this story:
Paul Sillitoe at