China’s Shandong Province First to Step Up Curbs on LGFV Debt

Authorities in Shandong said they won’t bail out the borrowings of cities or counties in the region, becoming the first province in China to follow the central government’s campaign to curb regional debt.

Shandong province, on the country’s east coast, banned all new debt raisings by local government financing vehicles, according to a statement dated Dec. 10 and posted on its website yesterday. Local governments should reasonably control financing demand for projects under construction, it said.

Questions about the future of LGFVs began in October when Premier Li Keqiang started to pare implicit guarantees for the regional financing units. The State Council said Oct. 2 that the finance arms can no longer raise funds for local authorities, and that the governments have no obligation to repay debt that wasn’t raised to fund public projects. Shandong is the first province to issue matching rules, Li Ning, a bond analyst at Haitong Securities Co., the nation’s second-biggest brokerage, said today in an interview.

“More provincial governments will issue similar regulations after Shandong,” said Yang Xiaolei, a bond analyst at China Securities Co. in Beijing. “In the near term, the rules will probably increase uncertainty in the LGFV bond market. LGFV bond yields may continue to rise.”

Sales Pulled

Earlier this month, two local governments pulled support for their financing vehicles’ planned debt sales. Changzhou Tianning Construction Development Co., based in the eastern province of Jiangsu, announced Dec. 12 it wouldn’t go ahead with a 1.2 billion yuan ($192 million) sale just one day after authorities said they wouldn’t support its debt. Less than a week later, officials withdrew backing for another planned LGFV issue in the northwestern province of Xinjiang.

Shandong is one of China’s wealthiest provinces and its gross domestic product is the third biggest in the nation. Home to about 97 million people, its capital is Jinan and other large cities include Qingdao, Weihai and Yantai.

It’s also no stranger to default controversy. CHTC Helon Co., a fiber maker which used to be called Shandong Helon Co., repaid 400 million yuan of notes in April 2012 even as it failed to make loan repayments.

The yield on Qingdao Laixi City Asset Operation Co.’s 2021 bonds has climbed 76 basis points in December to 6.621 percent yesterday, poised for the first monthly increase since the notes were issued in March, ChinaBond data show.

The extra yield investors demand to own one-year yuan-denominated corporate notes rated AA -- the most common score for LGFVs -- instead of Chinese sovereign debt has risen 94 basis points this month, the most since ChinaBond began compiling the data in 2008.

While a national audit showed regional liabilities swelled to 17.9 trillion yuan as of June 2013, the actual amount may be greater, China Business News reported Dec. 15, citing a senior planning official it didn’t identify.

LGFVs issued 67.7 billion yuan of bonds in December, the least in 11 months, according to data compiled by Bloomberg. The financing arms must repay a record 558.7 billion yuan of securities next year, the data show.

— With assistance by Judy Chen, and Penny Peng

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