China to Tighten Approvals of Local Governments’ Bonds

China will tighten rules on bond sales by polluters, local government financing vehicles with higher debt levels and companies in industries with overcapacity as the government seeks to redirect the economy.

The National Development and Reform Commission, which approves bond sales by entities that local governments set up to finance projects, ordered greater scrutiny for bond sale applications from LGFVs with asset-liability ratios above 65 percent and credit ratings below AA+, according to a statement on the website of the nation’s top economic planner yesterday.

China has been seeking to control borrowing by local governments while stabilizing growth, on concerns that a slowdown may trigger defaults and saddle banks with bad loans. Local governments may have more than 20 trillion yuan ($3.26 trillion) of debt, former Finance Minister Xiang Huaicheng said in April, almost double the level disclosed in a 2011 report by the National Audit Office.

Local authorities need to pay about 1 trillion yuan a year in interest on their 15 trillion yuan of outstanding debt, including bank loans and bonds, according to Lan Shen, a Shanghai-based economist at Standard Chartered Plc.

The NDRC will also tighten its examination of bond sales by companies with debt-to-asset ratios exceeding 75 percent and credit ratings below AA+, according to the statement.

Encouraged Projects

The agency will accelerate and simplify the approval process for major state-level infrastructure projects and industries given priority for development, such as alternative energy, environmental protection and affordable housing. 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, according to the statement.

The NDRC will “appropriately control the size and speed” of bond issuance outside those categories, it said in the statement.

The NDRC is responsible for approving bond sales by companies that aren’t publicly traded, sharing supervision of China’s debt markets with the People’s Bank of China and the China Securities Regulatory Commission. About 63 percent of bonds sold by non-public companies in China last year had credit ratings below AA+, according to a report by the National Association of Financial Market Institutional Investors.

— With assistance by Helen Sun

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