China has restricted domestic investors from buying offshore yuan bonds—known as dim sum bonds—issued by local government financing vehicles (LGFVs) via the Bond Connect trading link with Hong Kong. This measure, reported by insiders, is part of efforts to address risks posed by the debt-laden LGFV sector.
The People’s Bank of China (PBOC) instructed brokerages and banks to halt such purchases, though it has not specified when the restrictions might be lifted. Dim sum bonds, which typically offer higher yields than onshore alternatives, have been a popular choice among investors. The average yield on LGFV dim sum bonds issued this year is 5.8%, over 300 basis points higher than onshore bonds.
This decision follows Beijing’s move to help local governments restructure debt through a 10 trillion yuan ($1.4 trillion) program while addressing mounting financial instability caused by an unprecedented property market crisis. Officials recently estimated the outstanding “hidden” local debt at 14.3 trillion yuan, significantly lower than the IMF’s 60 trillion yuan estimate.
Sales of dim sum bonds surged to 392 billion yuan this year, the highest since 2007, with LGFVs accounting for 40% of the total issuance. However, access for domestic investors has now been curtailed, raising questions about alternative channels like the QDII program.
The move underscores China’s commitment to controlling systemic financial risks, even as it limits financing options for indebted local governments.