Beijing’s deleveraging drive has seen rules impacting local government financing vehicles (LGFV) debt refinancing tightened, spurring a slump in issuance by the vehicles, which owe about 5.6 trillion yuan ($818 billion) to bondholders and are seen by some as the poster children for China’s post-financial crisis debt woes. A Ministry of Finance circular dated April 26 barred municipal governments from giving ownership of public assets or land to their local financing companies and prohibited the use of revenue from land sales to help the vehicles repay their debt. Ratings companies are flagging the possibility that 2017 could see the first ever default by a local financing vehicle, Bloomberg reports. This move “effectively closed the door” on Beijing’s support for the vehicles, as this was a key way for them to bolster their repayment abilities, said Moody’s. “The central government might need an LGFV default to send a clear signal to the market that it won’t always bail them out.”
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