MNI POLICY: Further China LGFVs Defaults Could Come: Moody's

     BEIJING (MNI) - A cash crunch for local government financing vehicles could

prompt further bond defaults by state-owned companies involved in local

infrastructure projects, a senior Moody's official told MNI Tuesday.

     "Defaults of LGFVs are due to liquidity (constraints)," Kai Hu, a senior

vice president at the ratings firm, told MNI. 

     Stricter regulations on non-standard credit assets have seen investors pare

holdings, leaving LGFVs struggling to find new avenues of finance, Hu said.

     "Usually the first defaults are in non-standard credit assets ... It's

largely due to stricter regulations leading to investors backing up and thus

lack of refinancing channels," he added.

     For local governments with weaker fiscal profiles, it will lead to more

defaults of non-standard credit assets this year, he said.

     Hu's comments came as Qinghai Provincial Investment Group Co, regarded as a

LGFV due to the levels of government support and supervision, defaulted on a

CNY20 million bond Monday. Although the company claimed the default was due to

"technical" issues during the payment process, the move further worried

investors already on edge. 

     "LGFVs need to improve their debt management," Hu told reporters. "But if

such defaults affect the overall stability of the regional LGFVs, higher-level

government will certainly intervene," he added.

     Overall LGFV debt is expected to be more manageable this year, as local

governments look to increase revenue from sales of state-owned assets such as

land, along with receiving fiscal transfers from central government, analysts at

Moody's told an earlier press conference.

     --NOT TRADE RELEATES

     Bond defaults seen last year in the auto, steel and aluminium sectors are

not directly related to trade tensions between China and the U.S., Moody's Hu

noted. This year, bond defaults won't be concentrated in specific areas and

would be "behaviour-oriented", not linked to the trade spat.

     "Last year's bond defaults were more due to individual companies' behaviour

such as weak governance, blind expansion of non-core businesses and

deteriorating relationships with major stockholders," Hu told MNI. "This year

bond defaults will continue not appear sector-oriented."

--MNI Beijing Bureau; +86 (10) 8532-5998; email: iris.ouyang@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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