SHANGHAI – Chinese regulators have closed a regulatory loophole that last year allowed heavily indebted local government financing vehicles (LGFVs) to further increase their borrowing, four sources familiar with the matter told Reuters.
LGFVs, set up by Chinese local governments to fund infrastructure investment, have been told to stop issuing offshore bonds with a 364-day duration, the sources said.
Their combined debt has ballooned to roughly $9 trillion, posing a major risk to China’s slowing economy, and Beijing has rolled out several measures to reduce local government debt risks, with new issuance of LGFV debt now tighthly regulated.
The latest guidance comes after a rush by many LGFVs to raise 364-day offshore bonds, seemingly in a bid to circumvent regulation that requires them to seek approval for borrowing outside China with maturities longer than a year.
China’s State Administration of Foreign Exchange (SAFE) said in a statement to Reuters it had not introduced new cross-border financing policies, adding that it will “actively cooperate with relevant departments to reduce LGFV risks, by strictly controlling new borrowings while dissolving outstanding debts”.
LGFVs have found onshore financing challenging, and they also have to seek approval from regulators such as the National Development and Reform Commission (NDRC) to issue offshore debt, unless the tenor of the bond is less than a year.
