China NDRC Said to Impose Stricter Controls on Local Bond Sales

China’s top planning agency issued stricter rules for approval of bond sales by local-government financing vehicles, people familiar with the matter said.

The National Development and Reform Commission, which oversees note sales by unlisted companies, won’t accept applications for issuance from units in regions whose outstanding LGFV debt exceeds 8 percent of annual economic output, the people said. They asked not to be identified because the new regulations haven’t been made public.

The move would limit local-government financing vehicles’ refinancing capabilities as they face a record 486.9 billion yuan ($79.5 billion) of bonds due next year. China announced plans on Oct. 2 to ban local authorities from additional borrowing through the units as Premier Li Keqiang steps up efforts to control financial risks. Most debentures regulated by the NDRC are LGFV bonds, according to Ping An Securities Co.

“The NDRC is probably trying to curb LGFV bond sales before the new rules banning them take effect,” said Shi Lei, head of fixed-income research at Ping An Securities, a unit of the nation’s second-biggest insurance company. “Because some LGFVs in highly leveraged regions may no longer get approval to sell bonds, default risks in their borrowings, especially trust products and accounts payable, will probably rise.”

A call to the NDRC’s news department went unanswered today and there was no immediate response to faxed requests for comment.

Liability Caps

The local government in whose jurisdiction a vehicle is located must not have borrowings exceeding 100 percent of its fiscal income, people said. The NDRC also won’t accept application for any kind of corporate-bond sales if the company’s debt-to-asset ratio exceeds 85 percent, they said.

Credit concerns are escalating as property prices fall, state banks increase bad-loan provisions and at least 10 trusts have been struggling to meet payments since May. Five-year AAA corporate bond yields in China climbed to 5.15 percent on Oct. 13, the highest since Sept. 23. They touched 6.31 percent in January, the most on record.

Shanghai Chaori Solar Energy Science & Technology Co. marked China’s first onshore corporate bond default in March when it missed a coupon payment.

China’s towns and cities have used more than 10,000 financing vehicles to sell notes after they were barred from directly issuing bonds under a 1994 budget law. The nation’s legislature passed amendments to the budget law at the end of August that lay the legal framework for allowing local governments to raise funds by directly selling notes.

Off-Budget Funding

Local-government debt swelled 67 percent from the end of 2010 to 17.9 trillion yuan as of June 30 last year, according to the National Audit Office. Almost 40 percent of the liabilities came from off-budget funding through their more than 7,000 financing vehicles, the auditor said in December.

The NDRC had suspended approvals this week for the sale of corporate notes, according to separate people familiar with the matter yesterday. A brokerage employee who attempted to submit a bond-sale application with the commission yesterday said that an official told him the agency was only looking at documents and not formally accepting the requests pending additional requirements for documentation.

— With assistance by Laura Yin, Steven Yang, and Judy Chen

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