China exchanges relax LGFV bond refinancing requirements

China's securities exchanges have relaxed requirements for local government financing platforms to roll over maturing corporate bonds, state-run China Securities Journal reported, in a move aimed at relieving debt burdens. The exchanges communicated the less-stringent rules to market participants through verbal instructions, known as "window guidance."
Previous screening criteria, which had prevented issuers that derived more than 50 percent of their revenue from government sources from issuing new bonds, have been relaxed. The instructions, reported in the China Securities Journal Wednesday, were confirmed by a broker.
The Shanghai Stock Exchange declined to comment, while officials at the Shenzen exchange weren't immediately available for comment. The broker noted that it primarily concerns local government financing vehicle (LGFV) bonds that mature within six months or that can be sold back to issuers within that period.
The move to allow LGFVs to roll over maturing bonds likely reflects a desire to ease repayment pressure and guard against default risks given significant LGFV debt maturities this year, the broker said. Despite the relaxed rules, exchanges will strictly limit the use of funds raised to repaying maturing debt, and the companies will not be allowed to apply for new projects, a Beijing-based trader said.
"We believe this is an interim measure to help LGFVs manage refinancing risk, while also supporting infrastructure investment to shore up the economy," S&P Global Ratings credit analyst Gloria Lu said in a statement. "In the longer run, we believe LGFVs will continue to transform their business model, and China will rely on more transparent means to finance local government spending."
S&P said the move signaled that Beijing is for now choosing to prioritise financial stability and fiscal expansion over local-government funding reform. A record number of Chinese issuers defaulted on bond payments last year amid a broad crackdown on shadow financing, and default risks remain high this year.