China LGFV Sells First Dollar Bond as Yuan Borrowing Costs Rise

Shanghai Chengtou Corp. sold the first onshore dollar-denominated bond by a local-government financing vehicle in China as yuan borrowing costs surge.

The funding unit issued $200 million of AAA rated notes with a 3.3494 percent coupon on Dec. 27, according to a statement posted on the website of the Shanghai Clearing House on Dec. 31. The bond was priced to yield 300 basis points more than six-month Libor, the statement said.

The Shanghai interbank offered rate, or Shibor, for six-month yuan loans has climbed 71 basis points since the end of November to 4.93 percent, according to the National Interbank funding Center. In contrast, six-month dollar Libor has held at 0.35 percent, according to data compiled by Bloomberg.

“Borrowing costs for dollar securities are much lower than for yuan notes,” said Li Ning, a bond analyst at Haitong Securities Co. in Shanghai. “It opens up a new fund-raising channel for LGFVs.”

Regional governments set up more than 10,000 local financing units to fund construction projects after they were barred from directly issuing bonds under a 1994 budget law. Local-government debt swelled to 17.9 trillion yuan ($2.96 trillion) as of June, compared with 10.7 trillion yuan at the end of 2010, according to data compiled by the National Audit Office.

— With assistance by Judy Chen

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