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China may consider exemption to 364-day offshore bond suspension amid LGFV risks
Debt Capital Markets
Image source: investweihai

China’s regulators may consider an exemption to the suspension of 364-day offshore bonds issued by local government financing vehicles (LGFVs), limiting their use only to refinance short-term offshore bonds, according to three sources with knowledge of the matter.

Some LGFVs have been in talks with regulators on the potential exemption, as a blanket suspension is feared to significantly raise their refinancing risks, one of the sources said. These LGFVs relied on the 364-day offshore bonds — which are denominated in both CNY and USD — as a form of bridge financing, as they do not fall under the regulatory supervision of the National Development and Reform Commission (NDRC).

China’s forex regulator, the State Administration of Foreign Exchange (SAFE), stepped in with its suspension after LGFVs in Shandong province rushed over the past two months to issue 364-day offshore bonds for purposes such as funding their projects, replenishing working capital and refinancing debt, REDD first reported 4 January.

SAFE did not respond to a request for comment by press time.

Regulators were concerned about high financing costs of these short-term offshore bonds, the first source said. For example, the officials found that the proceeds from a Shandong LGFV’s recently issued bond that were transferred back onshore were much less than expected, raising questions over the true financing cost, this source added.

Some LGFVs offered additional incentives or subsidies to entice investors, thus increasing the overall financing costs beyond headline yields, according to the first and second sources.

In December, at least nine LGFVs in Shandong issued CNY 2.7bn (USD 380.6m) in offshore CNY 364-day bonds and USD 187m in such USD bonds, according to data from financial information providers iFinD and Wind.

One of the latest issuances was a CNY 310m (USD 43.7m) 8% bond issued by Weihai South Sea Investment Development on 29 December. From October to December, another LGFV, Zoucheng Urban Assets Group, issued three sets of 364-day offshore CNY bonds totaling CNY 780m (USD 109.9m), with an average coupon of 7.8%.

Outstanding LGFV offshore USD bonds reached USD 76.5bn by the beginning of December, with USD 23.8bn maturing in 2024 and USD 35.6bn maturing in 2025, according to calculations by analysts at Citic Securities. LGFV interest-bearing debt has been estimated to reach CNY 60tn (USD 8.5tn at today’s exchange rate) as of 4Q23, double the amount registered in 2018, equivalent to roughly 50% of China’s GDP, according to analyst estimates. LGFVs had an estimated CNY 15.6tn (USD 2.2tn) in onshore bonds outstanding as of the same period.

Chinese regulators have been tightening scrutiny of LGFV offshore bond issuances to contain debt risks, REDD reported. While Shandong was not among 12 high-risk provinces identified by the central government, some cities in the province, such as Weifang and Qingdao, were assigned relatively high credit risks by investors, as their LGFVs had missed payments on shadow banking debt such as trust loans.

by Gary Guo, with assistance from Phoebe Peng

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