Strategic considerations: China’s National Development and Reform Commission (NDRC) is requiring LGFVs applying for a new offshore bond issuance to generate at least 50% of net profit from non-government sources. In several responses in March to issuance plans from LGFVs for new financing, the NDRC asked LGFVs to withdraw their applications if at least 50% of their net profit came from government contracts or subsidies. The NDRC has also asked some potential LGFV issuers to submit a letter of support issued by city governments that own them.

• Regulators are encouraging LGFVs to transform themselves from government financing vehicles to market-oriented industrial entities
• It is likely regulators will align standards for both onshore and offshore issuance, as previously offshore issuance was less regulated.
• LGFV interest-bearing debt has been estimated to reach CNY 60tn (USD 8.3tn) as of 2023, double the amount registered in 2018

China’s National Development and Reform Commission (NDRC) is requiring local government financing vehicles (LGFVs) applying for new offshore bond issuance quotas to generate at least 50% of net profit from non-government sources, two sources said.

In several responses in March to issuance plans from LGFVs for new financing, the NDRC asked LGFVs to withdraw their applications if at least 50% of their net profit came from government contracts or subsidies, the first source said.

The move reflects increased measures regulators are pursuing to control LGFV leverage after China’s State Council issued guidelines last year for local governments to defuse debt risks, especially in the 12 provinces deemed to be high risk, the sources said. The 12 provincial-level regions are Tianjin, Gansu, Inner Mongolia, Liaoning, Jilin, Yunnan, Heilongjiang, Guizhou, Guangxi, Guizhou, Ningxia, and Chongqing, as reported.

The latest criteria also demonstrate that regulators are focusing on sustainability, encouraging LGFVs to transform themselves from government financing vehicles to market-oriented industrial entities, the sources said.

Besides the criteria on net profit, the NDRC asked some potential LGFV issuers to submit a letter of support issued by city governments that own them, the first source said. The NDRC is also checking whether an LGFV and its core subsidiaries are on a list of issuers approved for refinancing existing debt, rejecting applications for issuance of offshore bonds for new financing such as project construction and replenishing working capital.

The latest restrictions come after regulators have tightened scrutiny over offshore LGFV bond issuance since last year. The State Council produced the list of LGFVs under surveillance and only allowed them to refinance outstanding onshore and offshore bonds, asking some of the issuers in the 12 indebted provinces to lower their fundraising amount for those refinancing bonds, forcing them to deleverage, as reported.

The LGFV net profit requirement has also been adopted for onshore bond issuance applications, the two sources said. The NDRC also asked LGFVs issuing onshore bonds for new financing to have no more than 30% of assets linked to the government and no more than 30% of revenue coming from government sources, the second source said. The sources believe that it is likely regulators will eventually align standards for both onshore and offshore issuance, as previously offshore issuance was less regulated.

LGFV interest-bearing debt has been estimated to reach CNY 60tn (USD 8.3tn at today’s exchange rate) as of year-end 2023, double the amount reported in 2018, and equivalent to roughly 50% of China’s GDP, according to analyst estimates. In addition to CNY 16.5tn (USD 2.28tn) in onshore bonds, LGFVs have about USD 72.9bn in outstanding USD bonds as of 9 April, 31% of which are maturing in 2024, according to data compiled by financial information provider iFinD.

Some analysts and investors estimated that the increased level of scrutiny will result in a continuous shrinking supply of LGFV offshore bonds this year, as net financing through LGFV USD bond issuances was a negative USD 96bn in 2023, in comparison with the USD 6.4bn refinanced through offshore USD bond issuance in 2022, according to iFinD.

by Gary Guo and Phoebe Peng