China’s First-Half Urban Construction Bond Issuance Balloons
What’s new: Chinese local governments significantly increased borrowing in the first six months through urban construction investment platforms as part of efforts to boost economic recovery from the Covid-19 pandemic.
Total issuance of urban construction investment bonds increased 30% year-over-year in the first half, exceeding 2 trillion yuan ($285.7 billion), according to China Chengxin Credit Rating Group. The net financing amount for the first half was 1.1 trillion yuan, close to the size of the whole year of 2019.
Amid a looser financing environment, urban construction investment enterprises can replace high-cost funds with lower-cost bonds, which can also extend debt maturity and help relieve short-term debt repayment pressures, said Wang Jun, managing director of the public financing rating department at Chengxin.
As China’s economy recovered well in the first half, macro policies are expected to return to normal in the second half. New special bonds issued by local governments and special bonds for pandemic fighting are expected to squeeze out urban construction investment bonds to some extent, Wang said. On the other hand, 1.2 trillion yuan of urban construction investment bonds are expected to come due in the second half, so local governments will face significant refinancing pressure, he said.
The background: Urban construction investment bonds are China’s quasi-municipal bonds. Their issuers, urban construction investment firms, are effectively government financing platforms. They make profits through government subsidies and belong to special market operators within the nature of the government.
In response to the 2008 global financial crisis, China launched a 4 trillion yuan stimulus package, encouraging local governments to establish urban construction investment platforms to invest in infrastructure projects.
Since 2014, China started to regulate urban construction investment bonds out of concern over systemic risks stemming from hidden local government debt. Borrowing through such platforms is no longer guaranteed by local governments, but government can still support these enterprises through subsidies and capital injections.
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