China Local Funding Unit Got Funds Illegally, Beijing News Says

Jiamusi New Era Infrastructure Construction Investment Group Co., a local government financing vehicle in northeastern China, used fabricated documents to illegally obtain funds, Beijing News reported on July 4.

The LGFV, based in the city of Jiamusi near the Russian border in Heilongjiang province, used fabricated urban planning documents to boost the area of land for which it owns the usage rights, Beijing News reported, citing Song Xueying, former head of the city’s Department of Land and Resources. The financing unit used the land as collateral to sell bonds, according to the report. Song is serving a prison sentence for taking bribes, the Chinese-language newspaper said.

Pressure to refinance old borrowings is forcing China’s LGFVs to issue a record amount of bonds this year. They sold 907.8 billion yuan ($146 billion) of notes in 2014, the most in the same period since at least 2002, data compiled by Bloomberg on so-called chengtou bonds issued by the financing units shows. While the case flags risks in LGFV debt, investors have already priced in such concerns, according to Qiu Xinhong, a bond fund manager in Guangzhou at Golden Eagle Asset Management Co.

“The news won’t have any impact on the performance of LGFV bonds,” said Qiu, whose firm oversees about 11.3 billion yuan. “The corruption scandal won’t weaken the local government’s implicit guarantee on the company and other LGFV borrowings.”

Regional authorities in the world’s second-largest economy established more than 10,000 so-called local government financing vehicles, or LGFVs, to fund construction projects after they were barred from directly issuing bonds under a 1994 budget law. Local governments are responsible for 80 percent of spending, while getting only about 40 percent of tax revenue, the legacy of a 1994 tax-sharing system, the World Bank said.

Jiamusi New Era Infrastructure has a total of 3.2 billion yuan of bonds outstanding, according to data compiled by Bloomberg. Five calls to the LGFV were not answered today.

The yield on Jiamusi New Era Infrastructure’s 2019 bond fell two basis points today to 8.2 percent, according to exchange data. The rate has declined 28 basis points this year.

— With assistance by Judy Chen

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