Rating companies say the risk of defaults in China has risen as Premier Li Keqiang pares implicit guarantees for local-government financing vehicles.
The yield premium over the sovereign for three-year AA corporate bonds, the most common grade for LGFVs, widened 21 basis points from last month’s four-year low to 198 basis points on Oct. 9. The State Council said Oct. 2 that the finance arms can no longer raise funds for local authorities, and that the governments have no obligation to repay debt that wasn’t raised to fund public projects. China International Capital Corp. predicts higher yields for new sales, while China Lianhe Credit Rating Co., a Fitch Ratings joint venture, says it can’t rule out defaults.
“The market is entering a new era,” said Chen Jianheng, a Beijing-based fixed-income analyst at CICC. “The time when everybody bought LGFV bonds for high returns without considering credit risks are gone. For any sales in the future, investors will apply a different set of criteria.”