China probes exposure of HK units of banks, insurers to local government debt, sources say

investing.com:

By Selena Li and Summer Zhen

HONG KONG (Reuters) — China's financial sector regulator is looking into the exposure of the Hong Kong units of domestic banks and insurers to the country's local government debt, three sources with knowledge of the matter said, as part of its efforts to contain credit risks.

The National Financial Reporting Authority (NFRA) asked the Hong Kong-based units of Chinese banks and insurers this week to report their holdings of dollar debt issued by so-called local government financing vehicles (LGFV), said the sources.

The regulator mainly asked them to reveal their exposure to offshore bonds issued by the LGFVs, set up by Chinese local governments to fund infrastructure investments, with a 364-day duration, said two of the sources.

The second half of last year saw a rush by many LGFVs to raise 364-day offshore bonds, seemingly in a bid to circumvent regulation that requires them to seek approval for borrowing outside China with maturities longer than a year.

Roughly $9 trillion worth of local government debt poses a major risk to the world's second-largest economy and the country's financial stability, economists say, amid a deepening property crisis and years of over-investment in infrastructure.

Beijing has rolled out several measures to reduce local government debt risks, including instructing some of the heavily indebted municipalities to delay or halt some state-funded infrastructure projects, Reuters reported in January.

All the sources declined to be named on the regulatory probe as they were not authorised to speak to the media.

The NFRA did not immediately respond to a Reuters request for comment. Bloomberg first reported the regulatory move on Thursday.

It was not immediately clear