Local govt debt rules eased

Curbs on debt issues by local government financing vehicles are being eased to boost funding for infrastructure investment that will offset slowing economic growth.

The National Development and Reform Commission, which regulates State-owned enterprise bond issues, on Wednesday said that it had lowered the debt-to-asset ratio for LGFVs that need to provide guarantees to 65 percent. It cut the ratios for AA+ and AAA rated LGFVS to 70 percent and 75 percent, respectively.

It did not specify what the previous ratios were.

The move is expected to spur a new wave of bond issues by LGFVs to meet a huge financing shortfall in infrastructure investment.

The regulator also lifted the debt-to-local GDP ratio for cities and counties. Enterprise bonds and medium-term notes issued by these jurisdictions can now be equal to a maximum of 12 percent of local GDP, compared with 8 percent previously.

Guo Tianyong, head of the Research Center of the Chinese Banking Industry at the Central University of Finance and Economics in Beijing, said the changes will help local governments solve the urgent problem of getting the financing needed for infrastructure investment.

"Maintaining stable growth is the most pressing task. There is still ample room to expand investment in China's vast central and western regions, though the changes are also likely to raise default risks facing some local governments," said Guo.

LGFVs must repay a record 698.73 billion yuan ($114 billion) of notes this year, compared with 304.1 billion yuan in 2014, Bloomberg reported.

The NDRC listed a number of favored areas for bond issues, such as the seven key sectors: Oil and gas pipelines, health and senior-care services, environmental protection, clean energy, food and water projects, transportation, and support services for oil, gas and mining.

Infrastructure investment has been designated as an economic driver. But many local governments are facing financial difficulties due to declining land sale revenues and tight debt controls.

In the first four months, urban fixed-asset investment rose 12 percent year-on-year to 12 trillion yuan, down 5.3 percentage points from a year earlier, according to the National Bureau of Statistics.

Guan Youqing, an analyst with Minsheng Securities Co Ltd, said that the growth of infrastructure investment must reach 25 percent this year if the GDP goal of about 7 percent is to be achieved.

The NDRC also said it cut the required debt-to-asset ratio for non-LGFV issuers that must obtain debt guarantees to 75 percent. It lowered the ratios for similar AA+ and AAA rated issuers to 80 percent and 85 percent, it said.

The NDRC encouraged LGFVs and non-LGFVs to finance public-private partnership projects by bond sales.

Industrial sector bucks trend in April

Industrial sector profits posted their first annual rise in China since September, in a sign that margin pressures may be easing at some firms, particularly in the price-sensitive energy sector.

Industrial sector profits in April rose 2.6 percent from a year earlier, the National Bureau of Statistics said on Wednesday, but were down 1.3 percent for the year to date, reflecting the extreme weakness of growth in the first quarter.

The statistics bureau said recent interest rates and fee cuts were boosting industrial profits. Analysts have been watching closely for any signs of a turnaround in the industrial sector.

Analysts see the recent bounce in oil prices, with the international benchmark Brent crude up around $15 between February and April, as a major factor helping profits rebound.

"The super simplistic model of Chinese corporate profits is that margin contraction or expansion aligns most closely with commodity prices, while volumes are driven more by construction activity," said Thomas Gatley, China corporate analyst at the economics consultancy Gavekal Dragonomics in Beijing.