SHANGHAI/SINGAPORE : Pressure is mounting on China's cash-strapped local governments as authorities move to shut a private funding route for their financing arms, according to planned new rules and people familiar with their aims, raising credit risks and default worries.Beijing has been tightening rules
SHANGHAI/SINGAPORE : Pressure is mounting on China's cash-strapped local governments as authorities move to shut a private funding route for their financing arms, according to planned new rules and people familiar with their aims, raising credit risks and default worries.
Technical changes published in draft rules by the Asset Management Association of China in late April with major industry ramifications show private funds would be barred from investing more than 25 per cent of their net assets in a single bond, or receiving middleman commissions from issuers. "Such measures are well-intended ... but could worsen LGFVs' credit environment," said Zhu Yangmo, partner of bond-focused Shan Ze Fund Management Co, whose funds invest in high-yield corporate bonds using fundamental analysis.
LGFVs, meanwhile, set up by local governments to fund infrastructure investment, are already struggling to meet repayment obligations in a slowing economy as sluggish land sales weighed on municipalities' income and balance sheets. But, he said, instead of buying a diversified portfolio, many funnel money into single LGFV bonds, typically earning underwriting fees in addition to management fees, a conflict of interest and a structure with high exposure to credit risks.
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