Fund-raising for China's local govt financing vehicles "more difficult"

Shanghai

WITH US$90 billion of bonds sold by local government financing vehicles coming due next year, China is walking a fine line between teaching investors a lesson and preventing widespread defaults.

The nation's clearing agency said this week that local bonds rated lower than the highest AAA grade are too risky to be used as collateral for short-term loans. That means about half of the outstanding one trillion yuan (S$212.53 billion) securities sold by local government financing vehicles, or LGFVs, in the exchange market can no longer be pledged to raise funds, according to Morgan Stanley.

Warning that these securities aren't risk free caused the yield spread on seven-year AA-rated local debt over Chinese government bonds to widen the most on record on Tuesday. Now, investors will be looking for clues as to which of the thousands of financial …