China’s Local Bond Sales Start Sooner Than Ever as Growth Slows

(Bloomberg) — Local governments in China are selling debt to raise cash earlier than ever to help shore up a slowing economy.

Authorities in Sichuan and Henan provinces offered a combined 87.6 billion yuan ($12.6 billion) of so-called special bonds Thursday in the earliest such issuance since nationwide sales began in 2015.

For a second straight year China has ordered local governments to advance the timetable for borrowing via bonds to speed up spending in areas like transport and energy infrastructure. Through 2018, sales began in March after the legislature formally approved the annual budget.

Policymakers are trying to manage the pace of a long-term slowdown in China’s economic growth, even though the economy is showing signs of stabilizing as an initial trade deal was reached with the U.S.

Analysts predict the debt will be well received by investors seeking lower-risk alternatives to corporate bonds, which are posting rising defaults. The central bank’s liquidity injections should also help — it said Wednesday it would cut the amount of cash lenders need to hold as reserves starting Jan. 6, unleashing about 800 billion yuan in funds.

“Demand will be high because local-government bond yields are higher than central-government bonds but of the same sovereign ratings,” said Xing Zhaopeng, a markets economist at Australia & New Zealand Banking Group Ltd. “Banks will prefer local government bonds for both safety and return.”

Henan province sold 5-year special bonds at 3.14%, 7-year at 3.31%, 10-year at 3.38%, 15-year at 3.67% and 30-year at 3.97%, according to a statement. Sichuan province issued 7-year, 10-year, 15-year and 30-year notes at the same rates and 20-year bonds at 3.71%.

The spread between 10-year municipal and sovereign bond yields has narrowed to 20 basis points, or 0.2 of a percentage point, indicating rising demand for local-government notes.

The Ministry of Finance allocated a special-bond quota of 1 trillion yuan in November so that proceeds can be put to work early this year. The total quota for 2020 could ultimately reach 3 trillion yuan, said Becky Liu, Standard Chartered Bank (HK) Ltd.’s head of China macro strategy. With an additional 2 trillion yuan in general bonds likely to be rolled over, total supply of local-government notes could top 2019’s around 4.4 trillion yuan, which was the most since 2016.

“We expect more local governments to announce bond-issuance programs in early January to lead to a strong start of LGB issuance in 2020,” Liu said. While this is within market expectations, “it will likely contribute to a slower decline or even marginal rebound of bond yields in early 2020, together with other factors including a likely stabilization of growth.”

Thirteen provinces and cities have already disclosed plans to sell more than 480 billion yuan of special bonds plans in the first quarter. Zhong Linnan, a fixed income analyst at Yuekai Securities Co., forecasts that 1.7 trillion yuan to 2 trillion yuan of municipal bonds will be sold through March; the total was 1.4 trillion in the first three months of 2019.