What risk? China investors snap up local government bonds as Beijing
tackles big debts
Send a link to a friend
[October 17, 2023] By
Li Gu and Tom Westbrook
(Reuters) - Chinese investors are rushing to buy bonds of local
government financing vehicles (LGFVs), including from the riskiest
issuers, as Beijing's fresh attempts to reduce local debt risks
encourages them to bet on an implicit government guarantee.
The scramble for yield has made LGFVs one of the rare popular investment
targets in the wobbly Chinese economy, where stocks and property bonds
have been slammed, and the yuan currency is weakening.
A slew of local governments - mostly debt-ridden ones such as Yunnan and
Guizhou - have started selling so-called refinancing bonds this month in
a special, one-time programme to replace other forms of borrowing.
Such bond issuance, expected to hit 1 trillion yuan ($136.79 billion) by
the end of this year, is widely believed to be part of Beijing's
measures to defuse debt risks of LGFVs - companies set up by local
governments to fund infrastructure investment, a key growth driver for
the world's second-largest economy.
As the local governments raise fresh cash, investors expect LGFVs which
have been constrained by the dire state of the property sector and
economy will stay well funded.
"The market is very excited about this new gift," said Zhang Ziyao,
founder and CEO of Shanghai Haisheng Fund Management Co, which is
focused on LGFV investment.
Haisheng, which manages 4.5 billion yuan of assets, has seen heavy money
inflows in recent weeks as investors seek LGFV bonds, compressing credit
spreads sharply.
For some bonds issued by risky LGFV borrowers, "yields could come down
150 basis points (bps) in just one day ... I have never seen such fever
before," Zhang said.
Lower bond yields, which move inversely with prices, bode well for LGFVs
which can borrow more cheaply. The credit spread of 1-year LGFV bonds
rated 'AA-' have shrunk 61 bps since August to the lowest level this
year, data from ChinaBond shows.
LGFV bonds - estimated at around 13.5 trillion yuan - were battered
earlier this year amid growing signs of fiscal stress, but have been
back in favour since July, when China's Politburo pledged measures to
address local debt problems.
Confidence rose further this month, as local governments started issuing
refinancing bonds to repay outstanding debts. As of Monday, 17
municipal, provincial and regional governments had unveiled bond
issuance plans exceeding 700 billion yuan.
[to top of second column] |
Sources told Reuters this week the People's Bank of China has
ordered major state lenders to extend the tenor and reduce interest
rates on outstanding LGFV loans.
MAJOR THREAT
LGFVs are financing vehicles set up by local governments to skirt
Beijing's caps on fiscal budgets and official borrowing.
Thanks to the perceived government guarantee, LGFV debt, which
includes loans, bonds, and shadow bank borrowing, has ballooned to
roughly 60 trillion yuan, posing a threat to China's financial
stability.
Huang Xuefeng, credit research director at Shanghai Anfang Private
Fund Co, said proceeds from the refinancing bonds carrying coupons
of roughly 3% will likely be used to replace LGFV debt with high
interest rates - which exceed 10% in some cases. That will buy time
for China's most debt-laden localities such as southeastern Guangxi
and eastern Shandong.
"Now that you have money on hand ... you would certainly address the
most pressing and urgent (debt) problems as a priority," Huang said,
adding his company has been increasing holdings of LGFV bonds in
recent months.
Haisheng's Zhang said that, unlike private property developers,
LGFVs are state-owned and the central government will make sure
their bonds won't default.
"You don't look at LGFVs' balance sheet. You look at policies,"
Zhang said. "I think LGFV bonds are very safe now."
Yao Yu, founder of YY Rating, a Chinese credit research firm,
agrees.
"LGFVs don't rely on operational cash flows to repay debt... they
rely on refinancing to roll over debt, whether through LGFV
themselves or through the local governments."
U.S. research firm Rhodium Group is among the sceptics, and reckons
LGFV bond investors are "dancing on the edge of a blade."
"We don't believe Beijing will take majority of local government
debt onto its balance sheet so that everyone got guaranteed," said
Allen Feng, associate director at Rhodium Group.
If an LGFV bond defaults and goes into restructuring, "we believe
creditors will pay the bulk of the bill."
(Reporting by Li Gu and Samuel Shen in Shanghai, Tom Westbrook in
Singapore; Editing by Vidya Ranganathan and Kim Coghill)
[© 2023 Thomson Reuters. All rights
reserved.]
This material may not be published,
broadcast, rewritten or redistributed.
Thompson Reuters is solely responsible for this content.
|