SHANGHAI (Bloomberg) - China has relaxed rules for bond sales by local government financing vehicles as the onshore market faces a third default in two months amid an economic slowdown.
The National Development and Reform Commission cut the required debt-to-asset ratio for LGFVS that need to provide guarantees on their securities to 65 per cent, according to a statement dated May 25. The economic planning agency reduced the rates for AA+ and AAA rated LGFVS to 70 per cent and 75 per cent, respectively, the statement said. The NDRC, which regulates bonds, didn't say what the previous requirements were.
Premier Li Keqiang is seeking to find ways to stimulate growth without sharply increasing leverage and sparking more defaults. Zhuhai Zhongfu Enterprise Co., a bottle maker in the southern city of Zhuhai, said this week it will miss a full bond payment on May 28 because of a "liquidity crisis."
That leaves it in line to become the third company to renege on onshore obligations since April when Cloud Live Technology Group Co. and Baoding Tianwei Group Co. defaulted.
"The aim of the rule change is to help stabilize growth," said Sun Binbin, a bond analyst at China Merchants Securities Co. in Shanghai. "To stimulate growth, we need more investments on public projects. We may see an increase in LGFV bond sales from now."
Chinese LGFVs must repay a record 698.73 billion yuan (S$151.79 billion) of notes this year, compared with 304.1 billion yuan in 2014, according to data compiled by Bloomberg.
The NDRC also lowered the required debt-to-asset ratio for non-LGFVs that need to provide guarantees to 75 per cent and cut those for AA+ and AAA rated non-LGFVs to 80 per cent and 85 per cent, respectively.
China's economy showed little evidence of an acceleration at the start of the second quarter, suggesting policy makers' steps to free up more funds for lending haven't been enough.
According to McKinsey & Co., by the middle of 2014, China's total debt had reached 282 per cent of gross domestic product, higher than some advanced economies, including the U.S., Germany and Canada.
China is encouraging bond financing for key areas and projects, such as for strategic emerging industries, elderly services, urban parking lot construction, power network upgrades and public-private partnership projects, according to the NDRC statement. The nation also aims to boost such funding for county-level companies, it said.
