Written by Xie Yu
HONG KONG (Reuters) – Chinese regulators are examining the use of cross-border mechanisms by indebted local governments to invest in offshore bonds, two sources said, adding that regulatory oversight is now underway. It signaled increased efforts to contain financial risks in lax regions. market.
The move comes as offshore bond issuance by local governments, which are already owed more than $9 trillion, has surged in recent months, with monthly issuance reaching its highest level in more than a year in January. Ta.
A rush to issue new offshore bonds by indebted local governments comes as regulations on onshore issuance tighten, and the economic slowdown and real estate sector crisis weigh on fiscal health, with many struggling to repay existing debt. It is being carried out in the midst of
Two people familiar with the matter said the China Securities Regulatory Commission (CSRC) last month approved a local government financing vehicle (Local Government Financing Vehicle), which borrows on behalf of the government, for asset management companies that hold Qualified Domestic Limited Partnership (QDLP) licenses. We asked about LGFV’s exposure to offshore debt.
First launched in 2012, this QDLP channel is loosely regulated and allocation-based, allowing domestic and foreign fund managers to raise capital from high-net-worth individuals and institutions in China and invest that money in offshore products. making it possible to do so.
The increased scrutiny on QDLPs comes as the institution is used to invest in offshore bonds by local governments, with investors tempted by the weak returns in the domestic market and the high yields offered by offshore bonds, and the Chinese government seeking to resolve local debt risks. This stems from suspicions that it could undermine the efforts of the government.
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It is unclear whether other cross-border investment mechanisms will face similar checks.
Separately, a team of officials from the CSRC and the State Administration of Foreign Exchange (SAFE) held a private meeting with QDLP’s fund managers in southern China’s Hainan province late last month, the people said.
Approximately 10 domestic and foreign asset management companies with QDLP licenses attended the meeting. Local governments in China have the authority to grant QDLP licenses, and Hainan is one of the countries most actively issuing such approvals.
The previously unreported meeting was held to review QDLP business practices over the past decade, with regulators asking managers how cross-border investment allowances were used. said the official, who declined to be named. Due to the sensitive nature of the issue.
It was not immediately clear whether or when regulators would take any action against the management.
CSRC and SAFE did not respond to Reuters requests for comment on Tuesday.
“Stricter measures”
Currently, the process of obtaining a QDLP license and QDLP financing is handled by around 10 local governments rather than central government regulators, making it one of the most flexible cross-border investment channels.
Some Chinese investors have recently offered QDLP license holders high fees to gain access to LGFV offshore bond allocations, one of the two sources and a third person said. In this case, they were offering up to 5% of the investment amount.
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LGFVs are primarily used to borrow on behalf of Chinese provinces and cities to finance infrastructure projects. These days, a large portion of borrowings are used to refinance debt.
Total local government dollar bond issuance reached $2.2 billion in January, the highest monthly amount since November 2022, according to data provider Dealing Matrix.
About 40% of 28 such bonds issued in January had a yield of 7% or more, compared with an average return of 3% for domestic bonds, according to the data.
Jesse Tan, senior credit officer at Moody’s (NYSE:), said: “As issuance by Chinese real estate developers has declined over the past few years, LGFVs will account for a larger portion of corporate bond issuance in 2023. “LGFV accounted for about half of the total,” and predicts that LGFV will continue to exist. It will be a major bond issuing sector in the future.
But economists say more than $9 trillion in local government debt poses major risks to China’s economy and the country’s financial stability amid a deepening real estate crisis and years of overinvestment in infrastructure.
The Chinese government has launched several measures in recent months to reduce local government debt risks, including forcing some heavily indebted municipalities to postpone or suspend some state-funded infrastructure projects. This includes instructing them to do so.
Earlier this year, regulators directed LGFV to stop issuing 364-day offshore bonds.
Although the offshore market represents a small portion of LGFV’s total debt, less than 5%, Moody’s Tan predicted that “regulators will tighten standards for LGFV’s offshore debt issuance.”
LGFV faces a maturity wall of $35 billion this year, rising to $24 billion in 2023 and $33 billion in 2022, according to Moody’s data.
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Even as the Chinese government ramps up issuance of new LGFV offshore bonds, existing debt on the market will cause “difficult conditions and disruption,” the QDLP license holder said. The person declined to be named because the matter is confidential.
