Chinese local governments’ special-purpose bond issuance in Oct hit highest this year, their total bond issuance so far 2021 hit new record driven by refinancing needs

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Chinese local governments issued 644.1 billion yuan special-purpose bonds in October, the highest monthly level this year, according to data released by the Ministry of Finance on Tuesday.

They issued a total of 876.1 billion yuan of bonds last month, which also included 232. billion yuan of general-purpose bonds, showed the data. In terms of purposes, the bonds included 614.5 billion yuan of new bonds and 261.6 billion yuan of refinancing bonds.

Special-purpose bonds are designated for investment in infrastructure and public welfare projects which are commercially viable. They must be repaid with income generated from the projects, compared with general-purpose bonds, which are paid back with local governments’ fiscal revenue.

Chinese local governments’ monthly bond issuance, including general-purpose bonds (green bar) and special-purpose bonds (red bar), according to the Ministry of Finance.

For the first ten months, local governments issued a total of 6.49 trillion yuan of bonds, including 2.47 trillion yuan of general-purpose bonds and 4.02 trillion yuan of special-purpose bonds, showed the data. By purposes, that included 3.66 trillion yuan of new bonds and 2.83 trillion yuan of refinancing bonds

Separate data from Wind Information showed that Chinese local governments have issued a total of 6.75 trillion yuan of bonds this year as of November 21, marking a new record high, rising 4.8% from the same period last year and surpassing full-year amount in 2020.

Considering that more than 700 billion yuan quota for local government special-purpose bonds this year is still unused, full-year local government bond issuance in 2021 will likely exceed 7 trillion yuan.

Notably, local government bond issuance last year was mainly driven by a surge in special-purpose bonds which are meant to fund infrastructure projects and other public-purpose projects, as the government stepped up support to the economy hit hard by the Covid-19 pandemic, but this year the growth was mainly driven by refinancing bonds.

The 6.75 trillion yuan of local governments bonds issued this year included 3.84 trillion yuan of new bonds, decreasing 15% from the same period last year, while refinancing bonds reached 2.9 trillion yuan, surging 53% from a year ago.

Analysts say that the surge in refinancing bonds came as a large amount of local governments bonds matured this year and also due to issuance of a large amount of some “special refinancing bonds”.

In previous years, local governments were required to disclose which specific maturing bonds would be repaid when they issued refinancing bonds, but this year, local governments issued more than 600 billion yuan of “special refinancing bonds”, which are used to repay existing debt but issuers are not required to disclose which specific bonds are repaid.

For instance, on September 13, Guizhou provincial government issued 3.3 billion yuan of the special refinancing bonds, proceeds of which were used to “dissolve hidden debt risks in county-level governments.”

South China’s Guangdong province issued a combined 96 billion yuan of the special refinancing bonds in October and November, as part of a pilot to reduce the province’s hidden debt risks.

Other regions such as Shanghai, Beijing, Henan province, Jiangsu province, Hebei province and Yunan province may follow suit and issue this type of refinancing bonds to replace maturing hidden debts, said Yang Yewei, chief fixed-income analyst at Guosheng Securities.

In terms of new local government bonds, this year’s issuance was significantly slower than previous years. According to data from Wind Information, they issued about 1 trillion yuan of special-purpose bonds in the first half of the year (excluding special-purpose bonds issued to help small banks replenish capital), which accounted for 27.4% of full-year quota, sharply lower than 61% a year earlier.

The much slower pace was mainly because the pressure for the government to boost economic growth is smaller and therefore the central government granted new special-purpose bond quota to local governments much later than usual, said analysts.

In addition, as aggressive special-purpose bond issuance in the past two years left a large amount of funds idle, authorities are getting stricter in reviewing projects this year, they say.

However, special-purpose bond issuance has picked up since July. As of November 21, local governments had issued about 2 trillion yuan new special-purpose bonds this year.

Average maturity for local governments bonds issued this year is 11.28 years, 3.72 years shorter than the figure seen a year earlier, showed Wind data. Total value of bonds with 10-year tenor or longer accounted for 60% of the total, 16 percentage points lower than a year earlier.

The shorter bond tenor came after the Ministry of Finance in November last year issued some guidelines, in which local governments were required to match the tenor of new special-purpose bonds with the term of the projects the funding is used for and to keep average tenor of new general-purpose bonds and refinancing bonds below ten years.

Chinese local governments started to independently issue bond in 2015, before which the Ministry of Finance issued bonds for them. They issued 3.8 trillion yuan of bonds in 2015, and 4 – 6 trillion yuan each year in the following years, showed official data.

After 13 years’ growth, local government bonds have become the second-biggest part of China’s bond market. As of November 21, outstanding local governments bond stood at about 30 trillion yuan, accounting for 23.1% of China’s total outstanding bonds, only behind financial bonds which accounted for 23.5%, according to Wind Information.