Chinese local governments embraced a new approach to support state-owned enterprises (SOEs) facing financial difficulties, with market-oriented moves more likely than direct fiscal support, Moody's Investors Service said on Wednesday.

The global ratings agency attributed this change to factors including restrictive central government regulations, noting that the scope for local governments wanting to support state-owned enterprises (SOEs) facing financial distress has been dwindling.

Regional and local governments (RLGs) can still extend support to distressed SOEs, which usually take the form of channels like support with asset sales and mergers with stronger entities, Moody's said in a report.

The way in which seven RLGs had responded to distress among their SOEs since October 2015 was a good illustration of this new approach, Moody's added.

Of the cases, just one received direct fiscal support, allowing it to make timely and full payments on two public bonds, although it was late with a substantial amount of other payments, it said.

The other six RLGs instead either merged their distressed SOEs with stronger peers, allowed them to fall behind with their repayments, or let them become insolvent. One of the RLGs, the northeastern province of Liaoning, allowed its distressed SOE to fall behind with payments on nine public bonds.

"This apparent reluctance to provide direct support may reflect new central government regulations that make it more difficult for RLGs to devote substantial fiscal resources to assisting commercial SOEs," it added.

Local governments were also helping distressed SOEs sell assets and use the proceeds to meet debt payments, thereby, limiting the risk of contagion without directly using fiscal resources, thus, preserving their own credit strength.

SOEs played an important role in the Chinese economy, and how to improve profitability continues to be a hot debate. Endi

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