China Orders Stricter Checks on Local Debt as Sales Surge

China is tightening checks on local bond sales in its latest bid to reduce risks as debt loads surge to a record amid slowing economic growth.

Underwriters must provide audit reports on local government financing vehicles, or the region in which they’re located, according to a document from the National Association of Financial Market Institutional Investors seen by Bloomberg News. The reports should be from the national audit bureau and be no older than three years.

China’s leaders are trying to limit risks at the fundraising units, which cities and towns rely on to bankroll construction projects, after they sold a record 1.5 trillion yuan ($244 billion) of notes this year. Authorities are considering requiring provincial governments shift toward direct municipal debt sales as they aim to cut reliance on LGFVs, a draft plan from the Ministry of Finance showed in October.

“The new rule shows NAFMII is getting stricter in approving LGFV bond sales,” said Dong Hui, a bond analyst at China Securities Co. in Beijing. “But I don’t think the issuance amount will drop a lot next year because LGFVs are under pressure to repay old debt.”

A press officer at NAFMII declined to comment.

China announced plans on Oct. 2 to ban additional borrowing via the local units. Concern is mounting some localities may struggle to repay their obligations, with economic expansion set to cool to 7.4 percent this year, the slowest in more than two decades, according to analysts surveyed by Bloomberg.

The tighter checks depart from previous requirements by stipulating underwriters disclose the original purpose of any LGFV bank loans new bonds are meant to repay, according to the document. If note proceeds will be used to replenish working capital, the arrangers must outline the method for calculating how much is needed.

An official report showed in December local government debt swelled 67 percent from the end of 2010 to 17.9 trillion yuan as of June 30 last year.

— With assistance by Judy Chen, and Laura Yin

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