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Local government bond sales surge amid Beijing’s infrastructure push

China is witnessing a surge in government bond sales driven by Beijing’s efforts to invigorate the economy crimped by slowing domestic demand and escalating trade tensions with faster infrastructure spending.

On the last day of August, local governments of Zhejiang, Shandong and Hubei provinces sold more than 120 billion yuan worth of bonds, a rare one-day amount which even caused a short breakdown to the bond issuing system.

Chinese local government bond sales by month. (Wind Information)

It’s the latest sign of accelerating issuance of new local government bonds (LGBs), which amounted to 461.4 billion yuan in July alone, compared with combined 332.8 billion yuan in the first six months this year, according to data from the Ministry of Finance.

LGB sales accelerated further in August to 592 billion yuan, according to data compiled by Wind Information.

China set a quota of 4 trillion LGB sales for 2018, including new bond sales as well as the swap program of existing bonds. About 3 trillion yuan bonds have been issued by the end of August, which means China could see combined 2.6 trillion yuan LGB sales during the three months from July to the end of September.

One thing to note, the LGB swap program, which started in 2015 and was aimed to strengthen debt management and control potential risks by swapping less-transparent local government debt with bonds trading on the public market has ended in August.

One more pressure for the bond market, there are 838.9 billion yuan LGBs maturing in 2018 and the figure will surpass one trillion yuan per year in the new few years, compared to 300 billion yuan LGBs maturing in each of the previous two years. The Ministry of Finance for the first time allowed local governments to e refinancing bonds to deal with the mounting maturities.

While bond supplies are soaring, China’s financial regulators have reportedly given commercial banks a new incentive to boost investment in local government bonds.

The authority is considering to reduce the risk weightings for bank holdings of LGBs from the current 20 per cent to zero, according to the state-run China Securities Journal, which would mean that banks could expand their purchases of such bonds without affecting their capital adequacy ratios.

In addition, Beijing has reportedly required that LGBs’ yields be at least 40 basis point higher than the average yields of treasuries of the same maturity in the previous five trading days.

That comes after the country’s top policymakers urged faster LGBs sales to provide funds for increased infrastructure projects to boost the economic growth. In particular, the Ministry of Finance required local government to sell near 1 trillion special-purpose bonds before the end of October.

As bond sales accelerates, China’s top economic planner the National Development and Reform Commission (NDRC) is approving infrastructure projects at a faster pace.

In mid-August, the NDRC approved several urban rail projects in Suzhou of eastern Jiangsu province and Changchun in northeastern Jilin province, with planned investment more than 170 billion yuan. Late August, the NDRC, jointly with the country aviation sector regulator, approved a total 28 projects in  the civil aviation sector with planned investment of about 110 billion yuan.

In addition, several projects in China’s underdeveloped wester region have been launched lately, including the Sichuan-Tibet railway, Chongqing-Yunnan high-speed railway and water diversion projects in Yunnan, with planned investment near 500 billion yuan.

Besides increasing bond sales, commercial banks are also granting more loans to infrastructure projects. According to data from the China Banking Regulatory Commission, Chinese banks’ granted 172.4 billion yuan new loans to the infrastructure sector in July, 46.9 billion yuan higher than the previous month.

“With bond supplies surging, the central bank is expected to offset the impacts on the bond market with liquidity injection via open market operation and moves to guide interest rate lower,” said Ming Ming, fixed-income analyst at the CITIC Securities.

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