Do New MOF Rules Mark Real Change for China’s Local Government Bonds?

Analysts say the release of new regulations by China’s Ministry of Finance on local government bond issuance do not mark a dramatic break from precedent when it comes to allowing regional authorities to issue new bonds to roll over old ones.

MOF recently issued the “Opinions Concerning Proper Performance of Local Government Bond Issuance Work in 2018” (关于做好2018年地方政府债券发行工作的意见), which was viewed by many observers are heralding a major change to financing by regional authorities, by extending the maturities for instruments to 15 and 20 years, and explicitly permitting the issuance of new bonds to roll-over old ones.

According to the Opinions the ceiling on the issuance of local government bonds used to repay maturing local government bonds in 2018 will be whichever is lower out of the bond issuance application volume and the maturing principal amount.

Other analysts have pointed out, however, that the new Opinions do not mark a major change from precedent, given that local government have always been permitted to “pay off old debt with new borrowings.”

Su Li (苏莉), chief analyst with Golden Credit Rating,  said to Yicai that the central government has allowed local governments to issue new bonds to roll over old ones ever since 2014, when the State Council issued directive 43, the “Opinions Concerning Strengthening Regulation of Local Government Debt” (关于加强地方政府性债务管理的意见).

In November 2016 MOF also issued the “Local Government Standard Debt Budget Administrative Measures” (地方政府一般债务预算管理办法) and the “Local Government Special Debt Budget Administrative Measures” (地方政府专项债务预算管理办法), clearly permitting regional authorities to issue bonds to pay back outstanding debts.

“‘Borrowing new to pay back the old’ is simply a financial management method, distinct from Ponzi schemes that involve circulation within the financial system without any form of real support,” said Su Li.

“Whether or not they generate risk is primarily determined by the repayment capability of entities, and entities on capital markets are precisely those with comparatively strong credit standings, who can obtain the approval of investors, and thus achieve stability when it comes to ‘borrowing new to pay back the old.’

“This is the reason that freeway enterprises and infrastructure finance enterprises have frequently been exposed as ‘borrowing new to pay back old,’ but still enjoy the good graces of the market.”

An official from MOF further points out that the new Opinions are designed to target the large volume of local government debt that is due in 2018 and the next several years.

Data from Wind indicates that a total of 838.9 billion yuan in local government debt is scheduled to come due in 2018, as compared to under 300 billion yuan for the past two years, and in excess of a trillion yuan each year over the next several years.

Local government debt has been one of the key focal areas for China’s ongoing deleveraging campaign.

China first launched is debt-for-bonds program in August 2015, when the National People’s Congress stated that “with respect to existing debt which has been raised via bank loans and other non-government bond means, during a transition period of around three year, arrangements will be made for the issuance of local government bonds to swap [this debt] within quotas.”

Tang Linmin (汤林闽) from China International Futures (中国国际期货股份有限公司) said that after three years of debt-for-bond swap work, the remaining stock of local government debt awaiting conversion remains quite small, while data from the Ministry of Finance indicates that as of the end of 2017 local government debt excluding government bonds was 1.7258 trillion yuan.

2018 has been confirmed by the State Council as the final year for the issuance of local government bonds for debt swap purposes, while the ceiling on the issuance of new bonds by local governments this year has been set at 2.18 trillion yuan.

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