China Increases Regulation On LGFV Offshore Bonds

Chinese regulators have closed a regulatory gap that allowed highly indebted local government finance vehicles (LGFVs) to expand borrowing last year by ordering LGFVs to cease issuing offshore bonds with a term of 364 days. Chinese provincial and local governments established LGFVs to finance infrastructure, but since then, their total debt has grown to around $9 trillion, posing a potential threat to the country’s economy.

The most recent move follows a rush by numerous LGFVs to issue 364-day offshore bonds, ostensibly in an attempt to get around a rule requiring them to apply for permission before borrowing money abroad for periods longer than a year. In January 2023, the National Development and Reform Commission (NDRC) released regulations pertaining to medium- and long-term foreign debt. However, it stated that financing for offshore debt with maturities shorter than a year was not subject to authorization.

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