The Chinese government hopes to boost the appeal of local government bonds to banks by means a sharp reduction in their risk weighting, amidst efforts to tackle regional debt issues and accelerate regional special bond issuance
Reports emerged over the weekend that the risk weighting of local government debt is set to be sharply reduced, in a bid to encourage banks to buy municipal bonds.
According to a report from China Securities Journal some observers expect the risk weighting for local government debt to soon be reduced to zero, which will greatly enhance their appeal to commercial banks.
Should the risk weighting of local government bonds be reduced to zero, it will put them on par with Chinese sovereign debt and policy debt when it comes to the assessment of risk-weighted assets, despite providing higher yields than the latter.
A bond trader from a private fund told China Securities Journal that banks are the biggest purchasers of local government debt, accounting for 80% of funds provided.
The news arrives just as Beijing pushes for accelerated issuance of local government special bonds, as well as calls for local governments to better deal with the issue of “hidden debt.”
Analysts see issuance of special bonds by Chinese local governments peaking in September and October given low volumes earlier this year, with the Ministry of Finance also expected to provide guidance on yields in order to enhance their appeal.