First LGFV default likely this year

Shandong moves to curb LGFV debt

Authorities in East China's Shandong province  said they would not bail out the borrowings of cities or counties in the province, becoming the first region in China to follow the central government's campaign to curb regional debt.

Shandong has banned all new debt by local government financing vehicles, according to a statement dated Dec 10 and posted on its website. Local governments should reasonably control financing demand for projects under construction, it said.

Questions about the future of LGFVs began in October when Premier Li Keqiang started to pare implicit guarantees for these bodies.

The State Council said on Oct 2 that LGFVs may no longer raise funds for local authorities and that governments have no obligation to repay debt that was not raised to fund public projects.

Shandong is the first province to issue corresponding rules, Li Ning, a bond analyst at Haitong Securities Co, said on Friday.

"More provincial governments will issue similar regulations", said Yang Xiaolei, a bond analyst at China Securities Co. "In the near term, the rules will probably increase uncertainty in the LGFV bond market. LGFV bond yields may continue to rise."

Earlier in December, two local governments pulled support for their financing vehicles' planned debt sales. Changzhou Tianning Construction Development Co, based in Jiangsu province, announced on Dec 12 that it would not go ahead with a 1.2 billion yuan ($192 million) sale just one day after authorities said they would not support its debt. Less than a week later, officials withdrew backing for another planned LGFV issue in the Xinjiang Uygur autonomous region.

Shandong is one of the wealthiest provinces and its GDP is the third-biggest in the nation. It is also no stranger to default controversy. CHTC Helon Co, a fiber maker formerly called Shandong Helon Co, repaid 400 million yuan of notes in April 2012 even as it failed to make loan repayments.

The extra yield that investors demand to own one-year yuan-denominated corporate notes rated AA - the most common score for LGFVs - instead of Chinese sovereign debt has risen 94 basis points in December, the most since ChinaBond began compiling the data in 2008.

While a national audit showed regional liabilities stood at 17.9 trillion yuan as of June 2013, the actual amount may be larger, according to media report.