Local Government Bond Issuance for April Exceeds Whole of Q1 2018

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New data indicates that local government bond issuance in China accelerated dramatically in April after a soft showing in the first quarter of 2018.

China saw 65 local government bond issues in April according to data released on 26 April, raising a total of 310.788 billion yuan, or more than the entire amount raised in the first quarter.

In the first quarter of 2018 China saw 67 local government bond issues across 10 provinces, including Hubei and Xinjiang, raising a total of 219.544 billion yuan for a year-on-year decline of 53.73% and decline of 73.37% compared to the preceding quarter.

According to Xinhua all of these bond issues were debt-for-bond swaps, including 142.6 billion yuan in standard bonds and 78.9 billion yuan in special bonds.

Analysts say one of the key reasons for soft issuance in the first quarter was that the volume of local government debt that authorities would like to swap out has fallen dramatically, while arrangements for the issuance of new bonds have yet to be made.

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.

China first launched is debt-for-bonds program in August 2015, with the National People’s Congress stating 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.”

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.

Dong Yuliang (董瑜亮), analyst with China Cheng Xin International Credit Rating, points out that as of the end of March non-government bond government debt had further fallen to 1.6458 trillion yuan, which means that at least 80% of the 14 trillion yuan in non-government bond debt scheduled for conversion into bonds has been processed.

Tang Linmin sees local government bond issuance further accelerating in the second quarter as arrangements fall into place for the issuance of new bonds.

Special bonds (专项债), or local government bonds tied to specific projects, are expected to be the focus going ahead, in particular special bond issuance associated with upgrades of China’s shanty towns and other public benefit projects.

“With swap work approaching its conclusion, a shift in the focus of local government debt work from the conversion of existing debt into bonds towards the issuance of new bonds is very natural,” said Tang.

“With regard to the increase in special bonds, we can expect that in future there will definitely be more new types emerging.”

Tang estimates that the total value of shanty-town upgrade special bonds issued could rise to as high as 200 billion to 300 billion yuan.

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