BEIJING -(Dow Jones)- China on Sunday issued rules regulating financing vehicles associated with local governments, indicating that it will shut financing companies or strip them of their financing operations if they are mainly dependent on fiscal funds for debt repayment in a public project.
The rules disclosed by the State Council are part of the government's effort to clean up local government financing vehicles, which have been responsible for the surge in local-government debt as a side effect of China's crisis-driven lending binge last year.
Many local governments have set up special investment vehicles that borrowed from banks to fund infrastructure projects, capitalizing these vehicles with the governments' land assets and providing guarantees for them. But concerns has been on the rise by the central government about the risk of loan defaults in the sector. Local governments in China cannot issue debt themselves, making it risky for them to guarantee loans if they face revenue shortfalls.
In a notice issued on the website of the central government, the rules say local governments must make a "comprehensive clean up of financing platform companies" and place them under three classifications.
It said financing platform companies undertaking public projects that rely primarily on fiscal funds to repay debt must stop such operations. It said local governments must place financing for such projects in their budgets or find ways to raise the funds through market-oriented means like bringing in private capital.
The rules said financing platform companies undertaking public projects that can rely on their own income to repay debt and financing companies that take on non-public projects must fall in line with laws that govern companies, including meeting requirements on company capital, governance and commercial operations.
Banks are not allowed to lend to financing platform companies that do not have a steady source of capital flow for repaying loans, the rules said.
Copyright 2009 Dow Jones Newswires
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