(Yicai Global) April 15 -- Chinese regulators have issued a more precise grading system of municipal bond issuers and are limiting how the financing is used, as the government moves to prevent and resolve the risk of hidden local government debt and also that of companies under district governments.

A new credit grading list, not available to the public, has been released by regulators to better classify and manage local authority bond issuers, industry insiders told Yicai Global. High-risk sellers of debt will only be allowed to use the financing to repay existing liabilities. Those at low risk will be permitted to use the funds for infrastructure and other projects or to supplement liquidity.

“The classification only applies to public bonds at present but is likely to be extended to other bonds in the future,” a bond underwriter said.

Local government financial vehicles, which are economic entities formed by local authorities or their departments, agencies and affiliates, had over CNY30 trillion (USD4.6 trillion) interest-bearing debt as of the end of 2018, making up 34 percent of China’s gross domestic product, per a research report from China International Capital Corp.

Most worryingly, their debt service coverage ratio is just 0.4, which means their operational cash flow was not enough to cover debt and interest due in 2018. They will face serious liquidity risks without refinancing.

Editors: Tang Shihua, Kim Taylor