Shanghai Bourse Encourages Sale of Local Government Bonds

(Shanghai) – The Shanghai Stock Exchange is encouraging securities firms to sell local government bonds on the bourse.

The plan was announced during a meeting held by the Shanghai Stock Exchange last Thursday, according to securities firm managers who took part in the meeting.

It would work like this: The top 20 security firms that sell the most local government bonds in terms of value would get fast-track approval on the Shanghai Stock Exchange for the listing of the corporate bonds they underwrite, securities-firm managers said. Similar benefits would also be offered for the listing of the asset-backed securities (ABS) underwritten by these securities companies. In particular, the securities firms would be first in the line to be able to sell ABS supported by the future cash flow from public-private partnership (PPP) infrastructure projects. Such infrastructure projects are proposed by local governments and carried out in collaboration with private companies.

The demand for such local debt has been sluggish in the past year. About 474.5 billion yuan ($68.7 billion) worth of local government bonds was issued in the first quarter of 2017, down by more than a half of the 955.4 billion yuan in the same period a year earlier, according to data compiled by Chinese financial information provider Wind.

China is trying to reduce leverage in the financial market by tightening liquidity. As a result, investors want more yield premium from local debts, which are much less traded than corporate bonds, said China Bond Rating Co. Ltd. in a research note.

The Chinese government issued a new policy on May 3, involving six government agencies, which include the Ministry of Finance, the Development and Reform Commission, the Central Bank and securities and banking regulators. A cross-department supervisory mechanism will monitor local governments’ spending and debt to tackle systemic risks.

Under the policy directive, local governments will be barred from using borrowed money to set up investment funds, from issuing excessive debt through PPP projects, and from offering any implicit guarantee to their financing vehicles. The document also ordered local governments to set up debt management teams to audit all local debts.

The average yield-to-maturity for five-year local government bonds was 4.11% on Tuesday, according to data compiled by Wind. Meanwhile, the yield-to-maturity for the benchmark five-year Chinese government bond in the interbank market was 3.54%.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)