As at March 21, a total of 50 local government bonds with a size of 187.5 billion yuan have been issued by Hebei, Xinjiang, Liaoning, Yunnan, Guangxi and Sichuan. All of them are local swap bonds. 103.7 billion yuan of bonds were issued to the public and 83.8 billion yuan were for targeted swap.
Compared with last March when over 788 billion yuan of local government bonds were issued, the issuance has slowed down significantly as only 187.5 billion yuan of local government bonds have been issued as at March 21.
21st Century Business Herald learnt that it may be a result of the rising capital cost. As the yield rate of national bonds with the same period hikes, the interest rate of local government bonds also jumped. The yield rate of the local government bonds issued in March hiked 56BP compared with the average yield rate of bonds issued last year.
Due to the tight capitals, the interest rate of the one-year interbank certificate of deposit is close to 5 percent and the cost of capitals is high. It is higher than the yield rate of local government bonds and banks are reluctant to invest or swap them.
Meanwhile, 2017 is the last year for the swap of local government bonds. The Ministry of Finance (MOF) required increasing targeted swap. Based on the statistics of the 21st Century Business Herald on issuance, targeted swap bonds have reached 45 percent. It accounted for about 32 percent of all swap bonds last year.
Issuance slows down
The issuance of local government bonds in 2017 initiated on Feb. 28. It was expected that March will see the first peak. However, the peak has yet come.
As at March 21, a total of 50 local government bonds with a size of 187.5 billion yuan have been issued by Hebei, Xinjiang, Liaoning, Yunnan, Guangxi and Sichuan. All of them are local swap bonds. 103.7 billion yuan of bonds were issued to the public and 83.8 billion yuan were for targeted swap.
The deficit of local government in 2017 was set at 830 billion yuan in addition to 800 billion yuan of special bonds. It means that the size of new local government bonds to be issued will be 1.63 trillion yuan, representing an increase of 450 billion yuan from last year. Besides, the swap of local government debts also increased the pressure on the supply of local government bonds in 2017.
Based on the arrangement of the MOF on the issuance of local government bonds in 2017, local governments should keep balance in each quarter. The issuance size is required to be controlled with 30 percent in each quarter in principle.
But the current issuance size is far below 30 percent and the size of the bonds issued during the same period of last year. Over 900 billion yuan of local government bonds were issued in the first quarter of last year.
One of the obvious changes this year is the higher yield rate of local government bonds. Based on the statistics on the issuance size in March of 2016 and 2017, the average yield rate of general bonds and special bonds hiked about 58BP and 56BP, respectively.
It is driven by the rising capital cost on the whole. The yield rate of three-year national bonds was 2.3 to 2.5 percent last March, but it hiked to 2.9 percent in March 2017, representing an increase of 40BP.
Meanwhile, based on the statistics of the 21st Century Business Herald, the interest rate spread between local government bonds and national bonds. The issuing interest rate of local government bonds tendered before March 16 is no more than 30BP higher than the yield rate the national bonds for the same period. But the interest rate of bonds opened for bidding on March 17 in Yunnan was more than 40BP or even up to 50BP higher.
The rising rate of local government bonds is attributed to the relatively tight capitals recently and the expectation on changes in monetary policies, indicated Yuan Quanquan, a researcher of the study and development department of Pengyuan Credit Rating Co., Ltd. the monetary policies of major economies in the world tend conservative since 2017. The U.S. dollars rate hikes, the declining bonds purchase in Europe, the MPA appraisal in China and the tightening monetary policies will affect the expectation on the market liquidity and drive the capital cost higher.
However, the overall interest rate spread between local government bonds and national bonds tends to shrink in 2016, indicated Shao Wei, an analyst from China Bond Rating Co., Ltd. told the 21st Century Business Herald. As the issuance of local government bonds just initiated not long before and the overall progress slows down, it is pending further observation on whether the interest rate spread between local government bonds and national bonds will expand after the issuance in the second quarter.
Targeted swap further develops
China will swap inventory local government bonds in about three years, Lou Jiwei, then minister of the MOF indicated in end-2015.
The State Council released a proposal on emergency treatment of local government bonds last November. It provides that “where the creditor does not agree to swap them into government bonds within the stipulated period, the original debtor shall assume the responsibilities for the repayment of the debts. The corresponding quota on local government bonds shall be withdrawn by the central government”.
It means that the issuance of swap bonds will not low this year. The balance of local government bonds is 15.32 trillion yuan as at the end of 2016. After deducting a balance of 10.63 trillion yuan of local government bonds at the end of 2016, 4.69 trillion yuan of debts is pending swap. Considering that certain contingent liabilities can be converted into level-I debts, about 5 trillion yuan of local government bonds is expected to conduct swap. The issuance size of swap bonds in 2017 is expected to be approximate with the 4.87 trillion yuan in 2016. The remaining swap size will complete in the first half of 2018.
When arranging the issuance of local government bonds in 2017, the MOF pointed out that local financial authorities shall increase the issuance of swap bonds through targeted underwriting. For the debts from the financing of inventory local government bonds from trust, securities and insurance institutes, local financial authorities shall actively issue swap bonds through targeted underwriting after the negotiation with all parties.
As a matter of fact, the highlight of the issuance of local government bonds this year is the higher proportion of targeted swap.
Unlikely the issuance of swap bonds in the open market, the interest rate of targeted swap is negotiated by local government with the creditors, such as banks, trust and other institutes. It will not determine the bidding-winning interest rate through open tendering like public issuances. Based on the issuance in the previous two years, the floating of the interest rate in targeted issuance is higher than the interest rate in public issuance.
Statistics show that the proportion of targeted swap is up to 45 percent, while it just accounted for 32 percent of the total swap debts last year.
Based on the statistics of the 21st Century Business Herald, the final bidding-winning price of targeted swaps is generally the upper limit of the bidding interest rate in public issuance, namely the yield rate of the national bonds of the same period floating 15 percent or 46 to 50BP upwards.
Despite the high rate, the issuance of local government bonds is not booming.
Currently, banks are reluctant to invest in or swap local government bonds due to the relatively tight capitals, He Jin, an assistant general manager from Bank of Guiyang Co., Ltd. (601997.SH). The interest rate of the one-year interbank certificate of deposit is close to 5 percent and the cost of capitals is high. It is higher than the yield rate of local government bonds. Compared with the yields of non-standard products of banks, the returns from the investment in local government bonds is relatively low. The returns of investments in local investment and financing platforms and the loans to large projects of state-owned enterprises are above 6 percent. It is the same with the swap. The original returns from loans of banks are high and it will be lower after the swap with local government bonds.
However, over 2 trillion of local government bonds matured last year. Compared with the actual swap limit of 4.8 trillion yuan, certain debts have conducted swap in advance.
As for the interest rate of local government bonds issued in the future, the issuance of local government bonds will face more complicated conditions in 2017, Shao told the 21st Century Business Herald. The issuing mechanism of local government bonds is more improved with better liquidity and it is attractive to capitals. The declining investment in municipal bonds and industrial bonds also unleashed certain capitals. However, due to the “prudent and neutral” monetary policies, it is expected that the medium-term monetary policies will be relatively tight. Besides, the stricter financial regulation will bring certain pressure to the digestion of new local government bonds as institutes, banks in particular, have limited capitals to invest in local government bonds.
Translated by Star Zhang
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