CHINA plans to exclude local governments from securitizing their debt through an asset-back securitization program, an industry association’s draft rules showed Tuesday.

    The plan is yet another move by the government to impair the ability of local government financing vehicles (LGFVs) to refinance, as the country’s leaders move to control municipal debt.

    But the draft rules show that the program will from now on be subject to the management of the Asset Management Association of China (AMAC) via a registration system in a liberalization.

    Previously, issuance had to be been individually approved by regulator that oversaw the issuers, such as the China Banking Regulatory Commission (CBRC) or the China Securities Regulatory Commission (CSRC).

    The AMAC said that local government debt, including the LGFV debt, will be included on a negative list for items eligible to be repackaged into asset-backed securities (ABS).

    Local debt raised the via Public-Private-Partnership (PPP) models, however, will not be on the negative list, according to the draft rules, which is in line with policy goals but also offering a potential loophole for reconfigured or privatize LGFVs to participate.

    Other assets proposed for inclusion in the negative list include income from mining activities and land sales.

    The association did not disclose when the regulations will be officially promulgated.

    The government has been gradually expanding the ABS program, originally launched in 2005 but put temporarily on hold during the financial crisis given the role ABS played in obscuring risk during the U.S. subprime mortgage crisis.

    China allowed the ABS program to resume in 2011, but the market remains small, with a combined issuance of 140.9 billion yuan (US$23 billion) in ABS by the end of last year.

    China is moving to manage a massive US$3 trillion in outstanding local government debt, much of it raised by LGFVs to finance infrastructure and real estate projects to spur the economy during the global financial crisis.

    In the latest sign of a sweeping clampdown, China’s official bond clearing house surprised traders Dec. 8 when it excluded what traders estimated to about 500 billion yuan worth of corporate bonds, most LGFVs bonds, from being used for bond repurchase agreements. (SD-Agencies)