Local Government Bond Issuance Expected to Peak in Second Half of 2018

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Bond issuance by China’s local governments is on track to hit a peak in the second half of 2018, as the debt-for-bond swap process draws to an end.

Data released by the Ministry of Finance on 18 July indicates that as of the end of June China’s nationwide local government debt balance was 16.7997 trillion yuan, still well within the quota approved by National People’s Congress.

Of this amount, standard debt accounted for 10.5904 trillion yuan and special debt 6.2093 trillion yuan.

Outstanding government bonds totalled 15.9948 trillion yuan, while outstanding non-government bond debt totalled 804.9 billion yuan.

MOF data further indicates that from the period from January to June 2018 a total of 1.4109 trillion yuan in local government bonds were issued in China, including 1.0436 trillion yuan in standard bonds and 367.3 billion yuan in special bonds.

Bonds issued for new fund-raising totalled 332.9 billion yuan, while debt-for-bond issuance or refinancing bonds totalled 1.078 trillion yuan.

MOF official Lou Hong (娄洪) said that local government bond issuance in 2018 was distinguished by two key features, the first being an increase in the “marketisation” of the pricing process.

Rates for local government bonds issued in the first half of 2018 were 42 basis points higher than China’s treasury bonds, for an expansion of 3 basis points compared to 2017 that better reflects actual supply-demand relations.

The second distinguishing feature was a higher level of market enthusiasm, with an average bid multiple (bidding volume/ planned issuance volume) for local government bonds of 2.56, or an increase of 0.68 compared to the average for 2017.

Analysts say that 2018 is set to be the the closing year for the process of swapping outstanding local government debt for bonds.

Local government debt issuance is expected to hit a peak in the second half of 2018, reaching a total of around 3 trillion yuan.

“As the window for local government bond swaps comes to a close, issuance of new bonds will gradually recover” said Wang Yuanhui (汪苑晖), analyst with China Chengxin Credit Rating Group, to Economic Information Daily.

According to Wang supply pressure will continually increase as the debt-for-bond swap process approaches an end.

New bonds issued to supplement shortfalls in local government finances as well as refinancing bonds will emerge as the primary components of new local government bond issuance.

The peak of local government bond issuance is expected to arrive in July or August, with an average issuance volume each month of up to 860 billion yuan, of which debt-for-bond swaps will be around 432.5 billion yuan, or nearly 3 times the issuance volume in June.

“It’s expected that in the second half the total volume of local government bonds issued will be around 3 trillion yuan,” said Tang Linmin (汤林闽), researcher with China International Futures Co., Ltd.

“The issuance pace on average will need to be at least 500 billion yuan per month, but given the the demand for funds for investment projects, the issuance peak will likely arrive from July to October, with a slight decline in November and December.”

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