New in­cen­tives for lo­cal debt

China Daily (Canada) - - FRONT PAGE -

the same value as any loans that they pre­vi­ously ex­tended to lo­cal gov­ern­ments.

That pro­vi­sion marks a sub­stan­tial de­par­ture from orig­i­nal ex­pec­ta­tions that all bonds is­sued un­der a pre­vi­ously an­nounced swap pro­gram would be sold in the public debt mar­kets. The pro­ceeds of th­ese is­sues would be used to re­pay le­gacy debt to cred­i­tors, mainly banks.

The “car­rot” is that th­ese bonds can be used as col­lat­eral to get PBOC loans and to get Trea­sury and lo­cal gov­ern­ment de­posit. They will thus be rel­a­tively liq­uid as­sets for the banks.

The three au­thor­i­ties or­dered re­gional gov­ern­ments to com­plete a pre­vi­ously re­ported 1 tril­lion yuan debt­for-bond swap plan by Aug 31, the me­dia said.

Re­ports of the new doc­u­ment’s con­tents ended nearly a month of spec­u­la­tion over how the cen­tral bank would push through the un­wieldy bond sale.

The Min­istry of Fi­nance in March an­nounced a 1 tril­lion yuan debt-for-bonds swap plan that would cut lo­cal gov­ern­ments’ in­ter­est pay­ments and ex­tend the ma­tu­rity of their debt. But that plan hit a snag on April 23 when Jiangsu prov­ince had to de­lay a bond is­sue af­ter fail­ing to agree on terms with banks.

In ad­di­tion to that orig­i­nal 1 tril­lion yuan, the lo­cal gov­ern­ment debt pro­gram in­cludes 500 bil­lion yuan of new­gen­eral-pur­pose bonds and 100 bil­lion yuan of spe­cial-pur­pose notes, as well as rollovers of 171.4 bil­lion yuan.

The re­sult­ing 1.77 tril­lion yuan of debt, a gi­gan­tic sum for China’s bond mar­ket, raised con­cerns of a crowdin­gout ef­fect that will drain liq­uid­ity and drive up in­ter­est rates.

The fears have been al­le­vi­ated by the lat­est doc­u­ment, be­cause up to 900 bil­lion yuan of bonds will be ab­sorbed via “pri­vate place­ment” with banks, ac­cord­ing to an­a­lysts at Haitong Se­cu­ri­ties Co Ltd and Min­sheng Se­cu­ri­ties Co Ltd.

Th­ese bonds would go into banks’ vaults rather than be­ing traded in the in­ter­bank or se­cu­ri­ties mar­kets, the doc­u­ment stip­u­lated.

Jiangsu prov­ince has restarted its bond sale, with plans to sell the debt onMon­day, ac­cord­ing to a state­ment on the China Cen­tral De­pos­i­tory & Clear­ing Co’s web­site. But the is­sue has been scaled down to 52.2 bil­lion yuan from 64.8 bil­lion yuan. All the new bonds will go into the mar­ket.

The 52.2-bil­lion-yuan bond has been rated AAA by China Credit Rat­ing Co Ltd. Huo Zhi­hui, chief an­a­lyst at the agency, said that fu­ture bond is­sues by Jiangsu are ex­pected to be sold un­der the “pri­vate place­ment” method.

He fore­cast that next week’s is­sue will bear an in­ter­est rate that is 5 to 10 per­cent higher than that for Trea­sury debt of the same ma­tu­rity, which would be 3.5 per­cent to 3.8 per­cent.

In an ap­par­ent sign of con­cern over the debt costs of lo­cal gov­ern­ments, the cen­tral gov­ern­ment doc­u­ment stip­u­lated that in­ter­est rates on new bonds may not ex­ceed those on Trea­sury debt of the same ma­tu­rity by more than 30 per­cent.

HuangWen­tao, chief econ­o­mist at China Se­cu­ri­ties Co Ltd, said that the plan is sim­i­lar to a pro­gram in 2007, when 1.35 tril­lion yuan of spe­cial Trea­sury debt was is­sued di­rectly to Agri­cul­tural Bank of China Ltd.

Af­ter the lat­est in­ter­est rate and re­serve re­quire­ment ra­tio cuts, money-mar­ket rates have fallen and banks are flush with cash. Since the PBOC’s con­di­tions mean that the debt in­volved in the lo­cal-gov­ern­ment plan will be rel­a­tively liq­uid, banks will not lose money on th­ese in­stru­ments, Huang said.

Wang Tao, chief China econ­o­mist with UBS AG, said: “We be­lieve such swaps will not only lower lo­cal gov­ern­ments’ debt ser­vice bur­den, but also lower po­ten­tial non­per­form­ing loans for banks, re­duce banks’ cap­i­tal charges and im­prove their loan-de­posit ra­tio.

“Although banks’ earn­ings will be hurt by the lower yields of bonds (rel­a­tive to higher in­ter­est on loans), we be­lieve the mar­ket will value banks’ gains in risk re­duc­tion and liq­uid­ity over their loss in in­ter­est rev­enue.”

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