China to Allow Local Governments to Issue Bonds via Bank Counters
China is expanding a pilot program to allow retail investors to buy local government bonds at bank counters, in a bid to prop up demand in the bond market.
Retail investors can currently only buy local government bonds through the Shanghai or Shenzhen bourses. Regulators last month issued a notice to broaden the number of venues at which individual and institutional investors can buy local government debt to include bank counters, but this was limited to bonds already issued.
Now, regulators are making rules to allow the new issuance of local government bonds at bank counters as well. A pilot program is expected to launch in six provinces and cities starting in 2019.
The six pilot provinces and cities will be all across the country, including its more-developed and less-development areas.
According to the notice co-released last month by the People’s Bank of China, the Ministry of Finance and the China Banking Insurance Regulatory Commission, banks in the cities where the issuers are located will be given priority when allowing them to sell local government bonds via their respective counter businesses.
The priority aims to encourage local residents to invest in their local government’s bonds, so as to have a constraining effect on the use of funds from the bond issuance.
Details of the rules are yet to be finalized, a person at China Central Depository & Clearing Co. (CCDC) told Caixin. CCDC is a state-owned operator of the government bond depository system.
The first step is to find the finance departments of some provinces to sell the remaining local government bonds already issued this year via bank counters. The affected provinces and when this will happen have yet to be decided, the CCDC person said.
The second step is to choose some pilot provinces to issue new local government bonds directly at bank counters starting next year, the person said.
Currently, Chinese retail investors can already purchase treasury bonds issued by the central government and policy bank bonds at bank counters. The Ministry of Finance and policy banks can also directly issue book-entry treasury bonds and policy bank bonds at bank counters.
In the first half of 2018, China issued 62.1 billion yuan ($8.99 billion) of bonds via bank counters, nearly all of which were issued by policy bank China Development Bank.
Thirteen commercial banks provide a bond counter business. These include the five big state-owned banks, as well as China Merchants Banks, China Minsheng Bank, and Industrial Bank.
China’s local governments have been speeding up new debt issuances as part of the central government’s effort to shore up the economy. China has capped outstanding local government debt issuance for 2018 at 21 trillion yuan.
Commercial banks currently hold nearly 90% of the local government bonds, compared with nearly 70% owned by individual investors in the U.S., so the Chinese government is trying to broaden the investor base of local government bonds.
Since July 2017, retail investors have been allowed to invest in local government bonds through the stock exchanges, but investors with securities accounts usually have a bigger appetite for risk and have shown limited interest in less-risky local government bonds. The regulators therefore turned their sights to bank-counter businesses.
In addition, bringing the trading and issuance of local government bonds to bank counters available to individual investors will require greater transparency on information disclosure of local government debts, a person close to the regulators said.
Caixin has learned that the Finance Ministry is leading the work to revise guidelines on disclosure of local government bonds and will require standard disclosure forms and content on bond issuance.
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