Local Governments Given More Options for Issuing Bonds

China has expanded localities’ fundraising options by introducing longer-term local government bonds as regulators continue to tighten their grip on alternative forms of financing.

Local governments can now issue two-year, 15-year, and 20-year ordinary bonds and 15-year and 20-year special purpose bonds, which are repaid through project proceeds, according to a notice from the Ministry of Finance published on Tuesday. Local governments already have many options to issue bonds with maturities of 10 years or less. The ministry also encouraged banks, securities firms, insurers and individuals to invest in local government bonds.

“Most issues in the past were short-dated, which may not have been able to serve the appetite of real money investors such as insurers or pension funds, which are looking for long-dated assets,” said Raymond Yeung, chief economist for Greater China at ANZ Bank.

“Longer-term bonds better match the project lifespan and payback period of the infrastructure projects they fund,” said Qiao Baoyun, head of the Academy of Public Finance and Policy at the Central University of Finance and Economics in Beijing. “The market structure is more mature now for the addition of bonds with longer maturities, which carry higher risk than short-term bonds.”

As local governments get more bond issuance options, regulators continue to clamp down on alternative financing methods through local government financing vehicles (LGFVs) and public private partnerships (PPPs). Local authorities have scrapped PPP projects worth 1.8 trillion yuan ($282.5 billion) since mid-November, when regulators announced an overhaul to eliminate unqualified projects, China’s finance ministry said Wednesday.

“The move fits perfectly with the policy agenda to curb implicit guarantees,” said Raymond Yeung. “Long-dated instruments give local governments an additional way to raise long-term funding other than through PPPs and LGFVs. This will help define clearly what is and is not guaranteed by local governments.”

In addition to introducing longer-term bonds, the Finance Ministry also lifted caps on the amount of ordinary bonds with maturities under seven years that local governments can publicly issue. Localities, however, must limit the issuance of ordinary bonds with maturities of seven years or more to 60% of the entire year’s bond issuance, including all maturities.

The value of issued bonds with maturities over 10 years is not to exceed the value of issued bonds with maturities of two years and under.

“While the longer-term instruments prevent short-term liquidity risk for local governments the higher cost of longer-term debt could place more pressure on the government projects,” said Zhao Quanhou, head of the finance research center at the Chinese Academy of Fiscal Sciences.

The Finance Ministry also said it will explore options for selling local government bonds at commercial banks to make it easier for retail investors and nonfinancial institutions to purchase these products.

Local governments issued 219.5 billion yuan in bonds in the first quarter of this year, down from 474.5 billion yuan during the same period last year, according to the ministry. Total local government debt stood at 16.61 trillion yuan at the end of March, within the official limit of 20.99 trillion yuan for 2018.

Contact reporter Liu Xiao (liuxiao@caixin.com)