China tightens scrutiny of municipal debt

CHINA will put several thousand local government financial vehicles (LGFVs) under tighter scrutiny, while barring new LGFVs from selling bonds publicly, to plug loopholes in a scheme that aims to address municipal debt woes, two people with knowledge of the matter said.

By scrutinising the LGFVs, regulators hope to prevent them from raising money from new entities or shell companies, practices that could aggravate the debt problem, said the sources who declined to be named because they were not authorised to speak to the media.

China’s central bank and the finance ministry declined to comment.

LGFVs were set up by local governments to fund infrastructure investment but now represent a major risk to China’s slowing economy, with their combined debt ballooning to roughly US$9 trillion.

Chinese leaders in July promised a “basket of measures” to defuse local government debt risks, which analysts said will likely include special bond issuance, debt swaps and loan rollovers.

The new measures are designed to prevent LGFV’s debt from growing further via unregulated channels, one source said.

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“By identifying the scope of LGFVs, authorities will shut newly set-up vehicles out of the bond market,” the source added. REUTERS