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China’s finance ministry tightens ‘no bailout’ policy targeting regional companies, financing vehicles

The Ministry of Finance has withdrawn “implicit support” for the debt of entities linked to regional governments, making it clear that state-owned enterprises will not be in a position to benefit from a provincial government bailout.

“The debt of enterprises owned by local governments, including financing vehicles, is not government debt,” the Ministry of Finance said in a statement released on Friday, “local governments will not assume responsibility for repayment of these borrowings.”

Any outstanding borrowings that don’t meet the strict definition of local government debt from January 1, 2015 must be repaid by the entities that raised the funds, the statement said.

In regards to borrowings before the cutoff date, the ministry will continue to allow local governments to swap high-cost maturing debt for lower-cost debt, a programme that began in 2015, to ease debt repayment pressure and guard against financial risks, the MOF said.

However, some analysts expressed doubts over whether these entities would ever be allowed to default on their debt obligations, given the intertwined relationship between local governments and their financing vehicles.

They note the Chinese government has made similar statements before, but this has yet to dispel expectations among investors that state aid would be forthcoming during a financial crisis.

The reason behind the market perception is the complex relationship between local governments and financing vehicles.

“It’s very hard to draw a clear line between the two, probably unlikely for a while,” said Yang Yuting, greater China chief economist at ANZ bank in Hong Kong.

Local government financing vehicles (LGFVs), which were brought into existence to help circumvent restrictions on local government fundraising, usually take orders from local governments, providing funding for infrastructure and public utility projects. These entities usually service their debt repayments with government funds.

The reason that financial institutions have been active in releasing credit to LGFVs is the “implicit guarantee” in the form of letter of guarantee, commitment letters and other documents from government agencies, according to analysts contacted by the Post.

China’s new budget law bans LGFVs lending to local governments, however their subsidiaries have continued to act as funding channels.

Under the circumstances, “drawing a line between the two is very difficult,” said Shen Jianguang, chief Asia economist at Mizuho Securities in Hong Kong.

“The real intention of the statement is likely to send a signal to local governments to be more cautious about excessive borrowings,” said Shen.“It seems the central government is becoming a bit worried about local government debt.”

Local governments have issued 1.13 trillion yuan worth of bonds in the nine months to September 30, according to the data from the Ministry of Finance.

During the same period, bond issuance by LGFVs reached 2.5 trillion yuan, up from 1 trillion yuan a year earlier, according to statistics compiled by Mizuho Securities based on data from Wind Information.

The outgoing Finance Minister Lou Jiwei said at the G20 central bank governors meeting in October that Chinese local government debt had been expanding. He also pledged to monitor the issue and clamp down on illegal financing channels.