Local Government Debt Swaps Set to Accelerate Following New Bond Rules


The use of bonds to swap out local government debt in China is expected to accelerate, with the Chinese Ministry of Finance issuing new rules that extend the maturities of instruments as well as loosen issuance volumes.

China’s Ministry of Finance issued the “Opinions Concerning Proper Performance of 2018 Local Government Bond Issuance Work” (关于做好2018年地方政府债券发行工作的意见) (Directive 61) on 8 May.

The Opinions extend the maturities for local government bonds to as long as 15 or 20 years, as well as loosen the quarterly issuance volume.

They also stipulate that local governments may issue new bonds to roll over old bonds, and make advance payments when treasury funds are ample.

The move follows lacklustre issuance in the first quarter, as well as a sharp increase in defaults on the Chinese bond market.

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.

The action picked up up considerably in April, with data released on 26 April indicating that  65 local government bond issues raised a total of 310.788 billion yuan that month, or more than the entire amount raised in the first quarter.

Local government bond issues are still lagging compared to previous years however, with data from Tianfeng indicating that the period from February to April saw the issuance of  519.2 billion in local government bonds, for a decline of 26% compared to the same period in 2016, and 65% compared to the same period last year.

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.

Tianfeng forecasts a sizeable increase in local bond issuance during the period from May to August.

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 is 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.

The Chinese bond market has also seen a significant increase in the number of defaults since the start of 2018.

China had seen total of 18 bond defaults by 7 May involving 11 issuing entities, for an increase of six defaults compared to the same period in 2017. 14 of the defaults involved new issues, with a total of six new issuance entities.

Analysts from Chinese credit ratings agencies expect the defaults to have a heavy impact on the issuance of corporate bonds by non-financial enterprises.

Issuers with comparatively poor credit ratings that are more dependent upon non-standard forms of  short-term, high-interest debt could delay or even cancel issuance due to insufficient subscriptions or excessively high rates.

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