New risks loom for China debt, this time in dollars

NEW YORK: Just when it looked like the Chinese local government's financing troubles were a thing of the past, a new risk is looming.

The vehicles that grew to gargantuan size during the previous Communist leadership team's all-out drive for growth have been steadily addressed by current President Xi Jinping's lieutenants, largely through a Beijing-led bond swap programme.

Now, units set up by local authorities to fund construction projects are selling debt outside the country -in dollars. While issuance is still small, it's surging. A record $12.3 billion in such dollar bonds was sold last year, with more on tap in 2017, making local financing vehicles a rival for property developers as top Chinese issuers of US currency debt.



The obvious problem: the funding vehicles don't typically have dollar revenue to draw on for debt servicing, which raises repayment dangers if China's yuan keeps depreciating - a risk highlighted by the potential for accelerated Federal Reserve tightening.

"Plans to roll over or refinance when the bonds mature may be too optimistic," said Christopher Lee, a Hong Kong-based managing director of corporate ratings at S&P Global Ratings. "The funding window could close any time if the market volatility rises, or dollar rates surge, or there are unexpected credit events."