CBRC Tells Banks to Limit Investment in Local Government Bonds

CBRC Tells Banks to Limit Investment in Local Government Bonds

China’s banking regulator told lenders to be “cautious” when investing in bonds issued by local government financing vehicles as policy makers seek to rein in local borrowing. The China Banking Regulatory Commission has capped at end-2012 levels LGFV loans by banks, which are banned from providing guarantees to the entities’ bonds, Cao Guoqiang, Vice President of China Citic Bank Corp. (998), said at a teleconference.Total local government debt may have risen 13 percent over two years to 12.1 trillion yuan ($1.98 trillion) as of December 2012, Moody’s Corp. estimated in June, citing a National Audit Office review. That adds to risks that the central government will be forced to bail out local authorities. Banks had advanced 9.7 trillion yuan of loans to these financing vehicles as of June 30, according to the banking regulator.

Local governments set up more than 10,000 so-called LGFVs to fund projects such as roads, sewage plants and subways after they were barred from directly selling bonds under a 1994 budget law. Former Finance Minister Xiang Huaicheng said April 6 that local governments’ combined debt may have exceeded 20 trillion yuan.

A 4 trillion-yuan stimulus plan during the 2008-09 financial crisis swelled loans to companies, which they roll over or refinance with note sales.

The National Development and Reform Commission’s provincial branches will take charge of preliminary reviews of bond sales by unlisted companies, the China Securities Journal reported today. The so-called “enterprise bonds” are overwhelmingly from local-government financing vehicles, the report said.

The NDRC in April ordered greater scrutiny of debt sale applications from some LGFVs with credit ratings below AA+, according to a May 22 statement. The agency issued a separate notice in the same month to carry out a nationwide financial inspection of enterprises that have filed bond sale applications.

To contact the editors responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net; Katrina Nicholas at knicholas2@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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