Financial SOEs banned from financing local governments except buying their bonds

The Ministry of Finance set a red line for State-owned financial enterprises' investment and financing activities to prevent and reduce local governments' debt risks, according to Xinhua.

Except buying bonds issued by local governments, the State-owned financial enterprises are banned from offering any form of financing for local governments in a direct way or through local Stated-owned enterprises and institutions, the ministry said in a notice.

In addition, the State-owned financial enterprises are not allowed to set up new local government financing platforms, require local governments to provide guaranty or pay debts illegally, or provide debt fund as capital for local construction projects, government investment funds or public-private partnerships (PPP) projects, according to the notice.

"Currently, some local governments are still illegally running into debt in disguised form, with the forms of debt becoming increasingly diversified and the risk growing," said a director of the finance department at the ministry.

"It is due to the incorrect view of political achievements of some Party and government leaders, the failure to implement accountability for project approval and the efforts of some financial enterprises to stoke the fires," the director said.

An industry insider who has done long-term studies of local debts said the ministry's policy, targeted and precise as well as appropriate in strength, can avoid a serious impact on the normal operation of State-owned financial enterprises and prevent stock debt capital chain rupture and "the risk of dealing with risks".