Local Government Bond Issuance Expected to Accelerate As PBOC Frees up Liquidity

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Chinese analysts expect local bond issuance to accelerate in the second half of the year, as the People’s Bank of China continues to loosen money supply and ease up liquidity.

During the period from 17 – 21 July just following the conclusion of China’s National Financial Work Conference the Chinese central bank made net injections of 510 billion yuan, as well as made a further net injection of 220 billion yuan at the start of the week.

This ongoing monetary easing on the part of PBOC has compelled many domestic observers to conclude that liquidity in China has already passed its high point, particularly following loosening of policy ahead of expectations in June.

Such expectations have been further shored up by recent statements by policymakers at the central government and central bank work meeting on “reducing financing costs in the real economy,” as real interest rates maintain a month-long downward trajectory.

CITIC Securities fixed income research team speculates that PBOC has maintained loosened monetary policy since the end of June as part of efforts to pave the way for local bond issuance later this year.

With the Chinese government contenting to maintain strict real estate control policies, and industrial sector approaching the tale end of its inventory cycle, CITIC Securities analysts see a risk of inadequate demand during the second half.

Under such circumstances local government may engage in discretionary increases in infrastructure investment, in order to forestall the risk of an excessively rapid slide in aggregate demand during the second half.

Maintaining higher levels of liquidity will be help to curb the yields for local government bonds, facilitating debt issuance for the purpose of spurring regional economic development.

CITIC Securities’ assessment would appear at odds with recent policy signals pointing to a crackdown on local government debt as part of China’s ongoing deleveraging campaign.

These include the mooting of a lifetime accountability system for local government debt increases at the recent National Financial Work Conference, as well as the Chinese Politburo’s more recent remarks on the need to properly dispose of accumulate local government debt risk, as well as firmly control growth in covert debt.

China Merchant Securities analyst Xu Hanfei does not expect a strengthening of regulation in the short-term, however, and instead sees financial authorities spending the remainder of the year establishing a framework for improved regulatory coordination.

 

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