China credit spreads hit their widest level in nearly two years this week following new regulations that undermined long-held assumptions about implicit guarantees on debt linked to local governments.
Chinese localities have long used arm’s length local government financing vehicles (LGFVs) to skirt restrictions on direct fiscal borrowing and to finance infrastructure, contributing to a surge in economy-wide debt since 2008. LGFVs are among the biggest borrowers in the local bond market.
The spread between yields on 5-year Chinese government bonds and 5-year medium-term notes rated double-A minus reached 3.6 percentage points on Monday and remained at that level on Tuesday, according to data from the National Interbank Funding Center.
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