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China Says No More Local Government Guarantees For Corporate Bonds

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Chinese companies issuing bonds can no longer seek debt guarantees from local governments, or tell their investors that their bonds are backed by local governments, according to a new measures announced by China’s top State planning body.

A notice detailing new rules for corporate bond issuance issued Monday by the National Development and Reform Commission stated: "It is strictly forbidden for reporting enterprises to require or accept the local government and its subordinate departments in various names to provide guarantee or bear the debt repayment responsibility for their market-oriented financing."

It also said that bond issuers must publicly state that debt raised does not add to local government debt and that they are not serving any government financing functions.

The new measures are part of the Chinese government’s ongoing efforts to reduce both corporate debt, and systemic risk an the local government level. The notes stated that the measures were being taken to, "resolutely lay the foundations of preventing and resolving major risks and resolutely guarding against local debt risks" and "resolutely curb the hidden increase in local government debt."

China’s outstanding local government debt rose 7.5% year-on-year to RMB16.47 trillion ($2.56 trillion) at the end of 2017, up from RMB15.32 trillion (US$2.2 trillion) at the end of 2016, but below the maximum amount of RMB18.8 trillion permitted by the National People’s Congress for 2017. An estimated 88% of the debt is held in bonds. However, it is widely assumed that debt held by local government financing vehicles and public-private partnerships is significantly higher than reported.

There is increased concern about the financial burden being carried by China’s local governments.  According to a recent report by S&P Global Indices, China can expect to see a rising number of bond defaults in 2018, including the likelihood of a first ever default by a local government financing vehicle (LGFV). There will be a steady escalation in the amount of LGFV bonds reaching maturing over the next few years, from just over RMB1 trillion (US$158 billion) in 2018, to almost RMB2 trillion (US$300 billion) in 2021, putting additional financial strain on local governments.


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