LGFV in China Scraps Bond Sale After Government Says No Support

A local government financing vehicle in China’s eastern province of Jiangsu has delayed a bond sale after authorities ruled it wouldn’t be backed by the state.

Changzhou Tianning Construction Development Co. said it won’t go ahead with a 1.2 billion yuan ($194 million) offering planned for Dec. 15 because of market volatility, according to a statement posted on Chinabond’s website today. On Dec. 11, the finance bureau of Tianning district in Changzhou city said on the district’s website the bonds wouldn’t be categorized as government debt and the local government wouldn’t be responsible for repayment, reversing a statement sent the previous day.

The Finance Ministry has said local governments must detail all outstanding borrowings by Jan. 5 as it determines which of the thousands of financial entities set up by cities and provinces it may be willing to support. The step is one of several that authorities are taking to reduce leverage and limit risk without toppling economic growth.

There’s a “sentiment of uncertainty dominating the market,” said Qiu Xinhong, a money manager at First State Cinda Fund Management Co. in Shenzhen. “People are uncertain about which LGFV bonds will be counted as government debt and which won’t. That’s going to drive up corporate bond yields across the board and it will be difficult for LGFVs to sell debt.”

Little Tolerance

Two telephone calls to Changzhou Tianning Construction Development weren’t answered.

Earlier this week, China’s clearing agency for exchange-traded debt said local bonds rated lower than AAA are too risky to be used as collateral for short-term loans. Regulators are also considering restricting individual investors from buying corporate bonds rated below the top grade.

In China, credit scores of AA- or below are equivalent to non-investment grades globally, and many LGFV bonds fall into that basket, according to Haitong Securities Co.

Authorities have so far shown little tolerance toward outright defaults in bonds, trust products and other wealth management investments on concern such fallouts could stir social unrest, Fitch Ratings Ltd. said in a Dec. 11 note.

The yield spread on seven-year AA rated local debt over Chinese government bonds widened the most on record Dec. 9 with investors demanding a premium of 2.58 percentage points, up from 2.23 percentage points the day before. The spread was 2.59 percentage points Dec. 11, Chinabond data show.

Yields on five-year top-rated corporate debt in China averaged 5.06 percent Dec. 11. The rate touched 5.17 percent on Dec. 10, the highest since Sept. 18.

Local governments had some 17.9 trillion yuan of liabilities as of June 2013. LGFVs must find the means to repay about $90 billion-equivalent of maturing debt next year, according to data compiled by Bloomberg.

Changzhou Tianning Construction doesn’t have any bonds outstanding, according to data compiled by Bloomberg.

— With assistance by Helen Sun

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