CHINA has effectively banned domestic investors from buying offshore yuan bonds issued by local government financing vehicles through its business ties with Hong Kong, according to sources familiar with the matter, in the latest measure to contain the risks of the debt-ridden sector.

The People’s Bank of China has asked the country’s brokerages and banks to suspend purchases of so-called LGFV dim sum bonds through Bond Connect, a program that links the mainland and Hong Kong debt markets, said the people, who asked not to be named discussing a private matter. The people did not provide further details or indicate when these purchases might resume.

Dim sum bonds have attracted strong demand in recent years because of their generally higher yields than those in the domestic market, where Beijing’s monetary easing has lowered borrowing costs.

The PBOC did not immediately respond to a request for comment.

Although the details of the PBOC’s motivations are unclear, the move follows recent policy efforts to de-risk LGFVs which borrowed heavily during China’s previous infrastructure booms and are now seen as a potential threat for financial stability. It also comes after Beijing gave local governments a 10 trillion yuan (S$1.8 trillion) lifeline earlier this month to exchange hidden debt that is mainly owed by LGFVs.

Local authorities are struggling to service their debts as an unprecedented real estate crisis has wiped out land sales they depended on for revenue. Officials said earlier this month that outstanding hidden local debt stood at 14.3 trillion yuan at the end of 2023, far below the International Monetary Fund’s estimate of around 60,000. billion yuan.

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The Bond Connect, which also allows global investors to access China’s vast domestic debt market, is a popular channel for mainland investors to purchase dim sum bonds, including those issued by LGFVs.

It is unclear whether domestic investors can still purchase LGFV dim sum notes through other channels such as the Qualified Domestic Institutional Investors program.

Sales of corporate dim sum bonds, excluding certificates of deposit, soared to 392 billion yuan this year, the highest figure since Bloomberg began compiling such data in 2007. LGFVs account for about 40%. of total emissions this year.

The average coupon of LGFV dim sum bonds issued this year is about 5.8 percent, more than 300 basis points above that of their bonds sold overseas, according to data compiled by Bloomberg.

Bloomberg News reported earlier this year that China’s securities regulator had asked some investors to refrain from increasing their exposure to U.S. dollar bonds with a maturity of less than one year issued by LGFVs. BLOOMBERG