REPEAT: MNI: Refinancing Risks to Trigger More LGFV defaults

Repeats Story Initially Transmitted at 05:43 GMT Jun 7/01:43 EST Jun 7

     BEIJING (MNI) - Chinese local government financing companies are expected

to see further bond defaults this year due to the tight regulatory environment

and the government-led deleveraging campaign, a leading debt analyst told MNI in

an exclusive interview.

     "Painful costs are unavoidable during the financing reform of local

government financing vehicles (LFGVs) from rampant debt growth to an open and

transparent financing status," Amanda Du, a vice president and senior analyst

with Moody's Public, Project and Infrastructure Finance Group, told MNI.

     As China further reins in credit growth, causing financing costs to rise,

the government's deleveraging campaign and strict financial regulations continue

to weigh on financing and refinancing of LGFVs -- state-owned companies (SOEs)

which were set up by local governments to raise funds for local infrastructure

projects, Du said.

     In order to curb financial risks, the Chinese government has curtailed M2

growth from double-digit year-on-year gain to the 8.3% seen in April. Financial

institutions, previously the major funding source for LGFVs, are also under

strict scrutiny of the authorities, with sweeping new rules issued, including

the banning of lending to local governments. 

     LGFVs, although can still borrow from traditional lenders, face stricter

criteria and their alternative funding channels are increasingly closing down

after new wealth management product rules were issued in April.

     Though back in 2015 the Chinese government regulated that local governments

can only finance through issuing bonds, they are still reliant on LGFVs for

financing as local fiscal and financing capabilities cannot keep pace with the

ongoing need of local infrastructure development, Du said.

     But the central government stresses delineation between local governments

and SOEs, and LGFVs are increasingly vulnerable as local governments are not

expected to bail out SOEs or offer guaranteed return on investment or principles

to LGFVs like before.

     "But local governments still need to maintain economic and social stability

and avoid regional financial risks, so they may use other methods such as

influence financial institutions to support SOEs which are under risks of

defaults," Du said.

     --REFORM OF LGFVS

     Under various pressures, in recent years LGFVs have resorted to reforms,

such as mergers of smaller LGFVs into larger ones or transformation of

non-profit LGFVs to a mixed system of non-profit and for-profit, Du said.

     Despite critiques from some observers arguing that reforms of LGFVs lack

adequate speed, Du stressed the importance of a delicate balance between

tackling local government debt problem and risk controls.

     "The reforms can't be too quick because reaching the goal in a single leap

will cause systemic risks," Du told MNI.

     --DEFAULTS NECESSARY

     In recent months, certain Chinese companies, including some SOEs saw bond

defaults, causing investor caution over investing in the bond market. However,

Du said that might be overreaction, as reform and transformation could never be

finished without stepping out of the comfort zone.

     "Bankruptcies, financing hardship and financial risks are normal, which are

necessary during the process to further normalize the local debt segment," Du

said. "Only when these companies go through the pain will they invest and

develop construction projects on a market-based basis."

     Patience is needed and more time should be given to LGFVs, Du noted.

--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