China tightens rules on insurers to fight local govt debt risk

BEIJING (Reuters) - Chinese on Thursday tightened rules on insurers providing financing to local governments, as Beijing intensifies its crackdown on illicit local government borrowing practices.

Beijing has taken a series of measures in recent months to rein in local government debt as part of a broader effort by Beijing to reduce financial risks in the world's second-largest economy.

A notice from the insurance regulator, the China Insurance Regulatory Commission (CIRC) and the Ministry of Finance, said insurers were banned from offering illegal financing services to local governments or local government financing vehicles.

The CIRC and Ministry of Finance "resolutely ban" local governments from illicitly starting new projects and building new debt "through channels such as local government financing vehicles or government investment funds in the name of attracting insurance companies," they said.

Thousands of local government financing vehicles, or LFGVs, have been created across China by local authorities to bypass borrowing limits and to help them hit economic growth targets.

The vehicles have taken on trillions of yuan in debt from banks, the bond market and shadow lenders. Much of the debt comes with implicit local government guarantees.

In the notice, the regulator and finance ministry said that for any debt financing related to LGFVs, insurance companies are required to provide specific legal opinions on the compliance of their investments.

Insurance companies are required to view local government financing vehicles as normal state-owned companies, and conduct strict risk assessment of LGFV projects based on their commercial viability, rather than government creditworthiness.

The finance ministry and the insurance regulator also re-emphasised rules that were first made public on Friday that insurers are banned from using private equity investment schemes as a channel to skirt regulations and increase local government debts.

(Reporting By Shu Zhang and Engen Tham; Editing by Jacqueline Wong and Neil Fullick)