Beijing Moves To Protect Bond Holders As Local Government Debt Woes Mount

shaolin china

Photo: kevinpoh on flickr

China’s National Development and Reform Commission (NDRC), has ordered companies that are part of local government financing vehicles (LGFVs), to submit restructuring plans to bond holders, for their approval, according to Reuters. Beijing is looking to protect them from restructuring plans by local governments.Local authorities are reportedly looking to restructure the loans of LGFVs – hybrid local government-company entities that were set up to obtain infrastructure funds, after debt ridden local governments were banned from borrowing – which could leave bond investors with no protection. 

Moody’s this month claimed that China’s local government debt was 3.5 trillion yuan higher than the 10.7 trillion initially reported. Much of this local government debt was taken on by the LGFVs.

40% of loans taken on by LGFVs are expected to mature this year and in 2012 and NDRC’s move is being perceived as a clear ban on restructuring of LGFV assets and a precedent for other government’s that may choose similar solutions.

Meanwhile, Chinese credit ratings agency, China Chengxin International has put two LGFVs on watch. Yunnan Investment Holdings Group (YIHG), and, Yunnan Electric Power Investment (YEPI) were put on watch because their assets were expected to be transferred or restructured.

The NDRC has also ordered local governments to get ratings on the impact, that any restructuring may have on issuers. The new ratings must remain at the same level as current ratings for the restructuring to move forward.

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