Analysts expect heavy regulatory pressure to keep local government bond issuance at around 4 trillion yuan this year, roughly on par with the 2017 level.
The latest data from the Ministry of Commerce indicates that last year a total of 4.3581 trillion yuan in local government bonds were issued throughout China, of which 2.3619 trillion yuan were standard bonds and 1.9962 trillion yuan were special bonds.
In terms of usage 1.5898 trillion yuan were new bonds, while 2.7683 trillion yuan were bond swaps.
Analysts say that in 2018 the local government bond swap process is likely to reach their terminus, with another 1.7258 trillion yuan in non-bond government debt still primed for conversion.
According to Li Yunfei (李云霏), an analyst with Minsheng Securities, this year total local government bond issuance will remain at around the 4 trillion yuan level, roughly in line with the figure for 2017.
The share of bond swaps is sure to decline given the remaining volume of local government non-bond debt, however, which means that the public issuance volume will be greater than in 2017, and have an impact upon liquidity .
The number of new local government bonds issued in 2018 will depend upon Beijing’s deficit allocations to local governments, with many analysts opining that fiscal deficit rates will remain at around 3% this year.
According to a recent research report from China Bond Rating, should the deficit rate remain at 3%, then the total fiscal deficit for 2018 will likely be at least 2.5 trillion yuan.
If local government deficits account for at least 35% of the total as they did in 2017, then the local government deficit for 2018 will be approximately 875 billion yuan, likely requiring the issuance of a commensurate volume of bonds.
China Bond Rating does not expect a sizeable increase in the issuance of special bonds in 2018 given the copious issuance volume last year, and sees total new local government bond issuance of around 2 trillion yuan this year.