By now, there have been 12 provinces issuing local government bonds by tender at Shanghai Stock Exchange (SSE) after Department of Finance of Guangxi Zhuang Autonomous Region issued local government bonds worth 27.5 billion yuan on August 17. It is predicted that more than 500 billion yuan of local government bonds will be issued at exchanges by the end of August plus the government bonds issued by Sichuan provinces in Shenzhen Stock Exchange (SZSE) on August 1.
Many industry insiders indicated that issuing local government bonds at stock exchanges greatly enhanced popularity of this product. With the further marketization and normalization of local government bond issuance, local government bond is expected to see its position match with the volume of its issuance and trusteeship, becoming another major price benchmark in the financial market.
Many provinces have finished issuing government bonds in exchanges
Shanghai municipal government successfully issued 30 billion yuan of ordinary bonds through government bond system of the Ministry of Finance (MOF) at SSE on November 11, 2016. This was the first case of launching local government bonds by tender at stock exchange.
By now, 12 provinces or regions including Hebei, Shandong, Inner Mongolia, Sichuan and Hubei have finished issuing governments for 16 times. Among them, Hebei, Inner Mongolia, Hubei and Yunnan provinces have issued bonds for twice each, and Yunnan province saw the highest issuance volume.
Sichuan province issued 30 billion yuan of local government bonds by tender through government bond system of SZSE on August 1, becoming the first bond issuance at SZSE across the country. It is learnt that the province also becomes the one that issues government bonds at China Central Depository & Clearing Co., Ltd., SSE and SZSE.
Based on public data, over 450 billion yuan and over 10 billion yuan of local government bonds have been issued at SSE and SZSE respectively. In addition, the bonds issued at SSE will exceed 50 billion yuan by the end of August. If based on the estimation that a total of 5 trillion yuan of bonds will be issued during the whole year, more than 20 percent of local government bonds will be issued at stock exchanges, and mostly at SSE.
“Local governments choose to release government bonds at stock exchanges, which can not only broaden financing channels and attract more investors, but also accelerate issuance of local government bonds and increase its marketization,” said Li Xuzhang, professor from School of Economics, Party School of the Central Committee of CPC.
Marketization of local government bonds increases
The MOF is promoting market-based issuance of local government bonds in recent years. Many industry insiders told the reporter from Shanghai Securities News (SSN) that since local government bonds hit stock exchange, it becomes market-based.
“Firstly, more investors including banks, insurers, funds and securities companies participate in it.” A person from securities firm indicated that underwriter combined by banks and securities companies improves liquidity of product to some extent. Products are known by more people, hence attracting more investors. The increasing liquidity will attract various kinds of investors.
The reporter found that 32 securities companies have underwritten issuance of bonds worth over 300 billion yuan by tender, accounting for nearly 90 of total bonds. They are playing an important role in underwriting.
Nearly 90 provinces or cities have raised the ceiling of bidding rate from 15 percent to or above 20 percent. The ceiling of bidding rate of 3-year, 5-year and 7-year government bonds of Shandong province has been raised to 21 percent, 23 percent and 25 percent, and that in Inner Mongolia increases to 30 percent, which breaks the tradition that yield of local government can float 15 percent above benchmark rate of national bonds at most. Moreover, financial departments of many local regions set referential interest rate range for banks, but don’t impost limit on securities companies. The pricing can be completely decided by the market.
A market player said that although there is not a long time that local government bonds are issued on exchanges, they performed much better than expected. There will be more and more financing in the future. Market structure will also change. With the further marketization and normalization of local government bond issuance, local government bond is expected to see its position match with the volume of its issuance and trusteeship, becoming another major price benchmark in the financial market.
Translated By Vanessa Chen & Coral Zhong
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