Local Bond Payment Bill Doubles in Year Since China NPC
About 82.5 billion yuan ($13.4 billion) of paper sold by local government financing vehicles comes due in the three months ended April 30, or 37 percent of this year’s total of 224.84 billion yuan, according to data from China Chengxin International Credit Rating Co., Moody’s Investors Service’s joint venture in China. That’s 27.5 billion yuan of maturities a month, up from 13 billion yuan a year earlier.
Wen’s successor Premier Li Keqiang maintained the nation’s 7.5 percent economic growth target in his first address to the annual meeting of lawmakers today, highlighting risks in finance and fiscal areas. Total liabilities in China have swelled to 215 percent of gross domestic product, according to the Chinese Academy of Social Sciences, surpassing levels seen in Japan and Thailand before financial crises in those nations.
“Borrowing new debt to repay the old is still among the most commonly used tactics for LGFVs, so the market needs to pay close attention to the refinancing risk,” said Zhang Yingjie, Beijing-based deputy general manager in Chengxin’s research department. “Risks on LGFV bonds are rising.”
Local governments, which are barred from selling debt directly, have set up thousands of companies known as LGFVs to raise funds to build subways, highways and sewage works. Their liabilities rose to 17.9 trillion yuan as of June 2013 from 10.7 trillion yuan at the end of 2010, according to National Audit Office data.
Li told the National People’s Congress that China will develop a regulated regional borrowing mechanism and include local liabilities in its fiscal budget. The Ministry of Finance said it will sell 400 billion yuan of debt this year on behalf of regions, 50 billion yuan more than last year. It will maintain municipal-bond market trials, targeting the ultimate removal of the government financing function from LGFVs.
Fiscal spending and revenues both grew faster than target last year at 10.9 percent and 10.1 percent, respectively, helping the budget deficit meet its 1.2 trillion yuan target. China plans to run a shortfall of 1.35 trillion yuan in 2014, MOF said, amounting to 2.1 percent of GDP. Fiscal spending is targeted to rise 9.5 percent and revenue 8 percent.
“We expect an increase in issuance of municipal bonds in 2014,” said Becky Liu, Hong Kong-based Greater China rate strategist at Standard Chartered Plc.
China began a trial program in 2011 to let some local governments sell bonds directly and widened the pilot in June, allowing Shandong and Jiangsu provinces to join Zhejiang and Guangdong plus the cities of Shanghai and Shenzhen. A proposal that would have allowed authorities to sell notes within an approved quota was dropped from a revision of the budget law in June 2012.
Sales of LGFV bonds in February climbed to more than 40 billion yuan as of Feb. 26, the highest monthly issuance since November. A Moody’s report in November said most such firms have weak credit profiles, and that only 53 percent of the 388 companies it surveyed in June had enough cash to cover estimated payments and interest last year without refinancing.
“The risk in LGFV bonds lies in the financial status and refinancing ability of the regions the vehicles are located in,” said Chengxin’s Zhang. “Investors should show caution over regions which have the worst leverage ratios.”
China’s benchmark money-market rate is falling. The seven-day repurchase rate plunged 275 basis points this year to a nine-month low of 2.78 percent on March 3, according to a fixing published by the National Interbank Funding Center. The rate rebounded yesterday to 3.53 percent as the central bank drained 85 billion yuan from the financial system via sales of repurchase agreements.
The rate on Liaoning LGFV Jinzhou Economic Technology Zone Development Group Co.’s seven-year sinkable bonds fell from 9.1 percent in a sale in January to 8.38 percent at another issuance in late February, data compiled by Bloomberg showed.
Debt sold last month achieved even lower borrowing costs. Xiantao City Construction Investment Development Co., based in Hubei province, sold seven-year debt at 8.15 percent on Feb. 21, while Fengcheng City Construction Investment Co., located in Jiangxi, issued similar-maturity notes at 7.5 percent on Feb. 26.
The premium of five-year AA bonds, the most common grade for LGFVs, over top-rated corporate notes widened to 148 basis points on Feb. 12, the most since April 2012, before narrowing to 141 yesterday. The yield on China’s 10-year sovereign debt has declined to 4.505 percent since climbing to an unprecedented 4.72 percent on Nov. 20. The yuan, which declined a record 1.4 percent in February, slid 0.1 percent to 6.1505 per dollar in Shanghai today.
“As market rates tumbled, and yields slid in late February, sales rebounded,” said Li Qing, an analyst at Guotai Junan Securities Co. “The yields for LGFV bonds seem to be at a bottom.”
The People’s Bank of China has singled out LGFVs, industries with overcapacity and property developers as the three types of debt that face the highest default risks, according to its fourth-quarter monetary policy implementation report. The central bank, which said it will prevent the risks in certain regions and industries from spreading to the wider financial system, has pushed up money-market rates in an effort to cut debt levels in the economy.
“The NPC meeting will set the tone for upcoming economic and reform policies, including for regulation of banks’ off-balance sheet business, and the management of local government vehicles’ debt,” said Zhang Zhidong, fund fixed income investment director at State Street Global Advisors fund. He added that liquidity will remain ample through end-March.
To contact Bloomberg News staff for this story: Helen Sun in Shanghai at email@example.com