China asks firms to not add holdings in short-term LGFV bonds

China asks firms to not add holdings in short-term LGFV bonds

China’s securities regulator has asked some investors to refrain from increasing their exposure to less-than-one-year dollar bonds issued by local government financing vehicles, said people familiar with the matter.

Representatives of the China Securities Regulatory Commission sent the so-called window guidance to some Chinese asset managers in Hong Kong early this week to request that they no longer buy more of these notes, the people said, asking not to be identified as the matter is private.

The asset managers are allowed to sell the notes in the secondary market, the people said. These notes usually have a tenor of 364 days, they said.

Chinese investors are the major buyers of LGFVs’ offshore dollar bonds. The guidance is the latest alarm signal in the LGFV bond market, which has been considered safer than other debts after Beijing introduced measures to support local governments and rein in default risks of their financing vehicles.

China Securities Regulatory Commission didn’t immediately reply to a fax seeking comment.

LGFVs have been central to Chinese government efforts to boost the economy through infrastructure projects and provide public services. Most of them borrow debt in order to finance projects that would take years to generate profits. LGFV debts nearly doubled in a five-year period to about $9 trillion, according to an International Monetary Fund report issued in early 2023.

LGFVs face a record amount of maturing bonds this year. And issuing dollar bonds that mature in less than a year has become a popular financing tactic for LGFVs following recent government measures to curb onshore financing.

Demand to issue such short-term notes also increased because rules were loosened and they don’t require signoff from China’s National Development and Reform Commission.