CHINESE local government financing vehicles (LGFVs) are selling an unprecedented amount of offshore yuan bonds, skirting attempts made by Beijing to reduce their debt sales.
LGFVs have raised 163.6 billion yuan (S$30.6 billion) via so-called dim sum notes this year, the most since Bloomberg began compiling relevant data in 1993. The average coupon has risen to a four-year high of 5.82 per cent, more than double that of bonds they sell in mainland China.
The ballooning overseas debt sales, frequently for refinancing purposes, show how regulatory loopholes are undermining Beijing’s attempts to rein in risks for LGFVs. While it has prioritised borrowings curbs and offered debt swaps onshore, its restrictions overseas predominantly target investment exposure.
“The main reason is the relatively less restrictive regulations for LGFV offshore bond issuance,” said Freddy Wong, head of Asia-Pacific fixed income at Invesco. “Domestic regulation remains tight for LGFV issuers on taking on incremental debt.”
LGFVs have sold 5.4 trillion yuan worth of local-currency bonds onshore since 2024 began, down about 13 per cent on the year, Bloomberg-compiled data show. Issuance costs dropped to a record low earlier this year as the government provided targeted bailouts.
Onshore funding is more challenging for weaker LGFVs. According to Chang Li, an analyst at S&P Global Ratings, net financing for those with a domestic credit rating of AA+ or less has become “very small” or even negative.
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The lower-rated LGFVs’ financing woes have persisted even as policymakers have ramped up efforts to defuse risks, including last month’s announcement of a 10 trillion yuan programme for regional governments to swap hidden debt, which is mostly owed by their financing vehicles.
Although dim-sum bond coupons are already twice as high as those of onshore yuan notes, they remain cheaper than the cost of dollar debt.
That drove some LGFVs to repay or refinance dollar bonds with proceeds from offshore yuan notes to the first half of this year, Moody’s Ratings analysts including Ivan Chung wrote in a report earlier this month.
To be sure, payment pressure aside, some LGFVs also have to regularly make their presence felt in global markets so as to maintain the extra funding channels.
“It’s more about investor base and how they look at the credit that ultimately resulted in the different pricing dynamics that you see,” said Vanessa Chan, head of Asian fixed income investment directing at Fidelity International. BLOOMBERG
