What’s new: Chinese authorities have tightened scrutiny on offshore borrowings by local governments’ financing vehicles (LGFVs) amid broader efforts to tackle local government debt risks.
Regulators have repeatedly told LGFVs not to add new borrowings, an executive of an LGFV in Shandong province told Caixin. Companies planning offshore bond sales have recently found it difficult to obtain regulators’ approval and credit backing from banks, said the executive.
LGFVs usually seek Standby Letters of Credit issued by commercial banks when they sell bonds overseas, which offer a repayment guarantee by a bank and help reduce financing costs. But many banks have refused to issue such documents to LGFVs lately, according to the executive.
Why it matters: The development reflects regulators’ concerns over LGFVs using proceeds from high-cost offshore bond sales to repay domestic debts, further worsening their debt burden.
The LGFV debt problem has become acute because local governments are facing a sharp decline in revenue which poses an increasing default risk for LGFV debt.
Amid stricter control on LGFVs’ domestic bond sales, many companies have moved to offshore markets, mainly Hong Kong and Macao, for new financing sources. They usually issue bonds for one-year or three-year terms with high yields to attract domestic investors to purchase through derivative contracts and the qualified domestic institutional investor program, Caixin learned.
Financing costs of offshore issuances may exceed 10% due to commission fees paid to intermediaries, compared with less than 4% for domestic issuance.
But facing mounting debt repayment pressures, LGFVs have increasingly opted for pricey borrowing. Since August 2023, more than 50 offshore bonds have been issued by LGFVs in various localities, market data showed.
Contact reporter Han Wei (weihan@caixin.com)
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