China LGFVs Set Record Bond Sales Abroad – BNN Bloomberg

(Bloomberg) — China’s local government finance institutions, considered one of the biggest risks in the country’s debt markets, are finding respite in the overseas bond market as government moves to ease repayment pressures bolster investor confidence.

LGFVs have issued a record number of offshore bonds — including dollar bonds, offshore yuan bonds and those issued in other currencies — this year, with sales rising to $24.1 billion through July 22. That’s the highest level since Bloomberg began collecting data in 2013 and up 79% from the same period a year earlier.

Laura Li, managing director at S&P Global Ratings, expects LGFV dollar bond issuance to continue to grow in the second half of this year. “Onshore and offshore LGFV refinancing needs and interest obligations remain strong,” she said.

The issuance boom also underscores the popularity of LGFV bonds, as other high-yield options remain scarce amid the prolonged housing crisis. According to an index tracking the performance of LGFV dollar bonds, foreign dollar debt issued by LGFVs has returned 4.62% this year.

China’s $9 trillion LGFV debt market was once seen as Asia’s biggest financial risk. Investor confidence has returned in recent months as the government has sought to ease pressure to repay the debt. Last week, China told state banks to extend support so some of the most indebted regions could refinance by mid-2027, with funds raised onshore being used to repay offshore debt, Bloomberg reported.

“The attractive spreads on dollar LGFVs compared to onshore public bonds, coupled with the strong willingness of local governments to honor their offshore bonds,” are key reasons to watch the sector, said Aaron Ni, Asia fixed income investment director at Abrdn Plc.

LGFVs continue to face higher costs associated with offshore issuance. Xuchang General Investment Co., an LGFV investing in public services and urban infrastructure in China’s central Henan province, sold $50 million of two-year dollar bonds in June at a coupon of up to 9.5%. The bonds were used to refinance previous dollar bonds.

Onshore, LGFVs have trimmed their debt as regulators seek to rein in the sector’s credit risk. LGFVs reported the largest quarterly outflow of funding from the yuan-denominated funding market in the second quarter since Fitch Ratings Inc. began tracking the data in 2018.

Meanwhile, Beijing has raised expectations that it is ready to further support the sector.

Under a new directive issued last week, banks and provincial governments should help LGFVs pay down their debt, which matures no later than June 30, 2027, people familiar with the matter said. However, LGFVs will not be allowed to sell dollar bonds with maturities of 364 days or less unless the proceeds are used to refinance the outstanding debt, the people said.

In its latest long-term policy plan, the Chinese Communist Party said it plans to shift more revenue to local governments by allowing regions to receive a larger share of consumption taxes, a move that is likely to bolster local finances as the housing crisis has destroyed their main source of income.

The government had previously introduced a series of support measures, including a 1 trillion yuan refinancing program.

Despite supportive government policies, LGFVs still face serious challenges.

“The weak underlying credit quality of a large number of these LGFVs remains to be addressed,” said Judy Kwok, head of fixed income research for Greater China at Manulife Investment Management. “We believe prudent credit selection is key, as the underlying credit quality of LGFVs will become more important as government support changes.”

(Corrected the data description in the first, second and fourth paragraphs, as well as the headline and chart, to reflect that the data also includes other foreign bonds in addition to dollar bonds)