Local bond issuances to boost growth

China's first local government bond issuance for this year debuted this week, the earliest such issuance since 2015 and a month earlier than last year, with analysts signaling that policymakers are more determined than ever to spur economic growth through more investments.

Local governments of Sichuan and Henan provinces offered a combined 87.6 billion yuan ($12.6 billion) of special bonds on Thursday. Authorities in the city of Qingdao, Hunan and Zhejiang provinces also released the special bond issuance plans for January. The total amount of special bonds may exceed 800 billion yuan in the first quarter, according to analysts and data from the China Central Depository and Clearing Co Ltd.

The capital raised from the special bonds will be invested into municipal infrastructure projects, environment protection and transportation. About 89.7 percent of the first batch of special bonds in Sichuan and Henan have maturity periods of more than 10 years, the Ministry of Finance said.

The earlier-than-ever local government bond issuance came after the People's Bank of China, the central bank, announced plans to inject 800 billion yuan in the financial sector by cutting the reserve requirement ratio (RRR) for banks by 0.5 percentage point on Wednesday.

The PBOC said the RRR cut will save about 15 billion yuan in funding costs for banks this year, and the injected funds may help to lower the new benchmark interest rate－the loan prime rate (LPR) when banks will report the rate later this month.

The central bank's move was to coordinate with the local government bond issuance, to prevent liquidity tightening when the bond sales rise in January, said Wen Bin, chief economist with China Minsheng Bank.

Local government bonds are more attractive for banks because of the lower risk and higher returns compared with corporate bonds, said analysts. For example, for the 10-year special bond for toll roads in Sichuan, the coupon rate was 3.38 percent, compared with 3.1956 percent for the 10-year treasury bond on Thursday.

Liu Yu, an analyst with Guosheng Securities, said on Friday that the quota for newly-issued special bonds in 2020 may reach 2.95 trillion yuan, 800 billion more than the new quota in 2019, as the local governments have to increase financing resources to strengthen investment but with a limit in the budgeted fiscal deficit. Her prediction was in line with many experts.

The Ministry of Finance released a statement on Friday, indicating that the local government bond issuance work of 2019 was "successfully" completed. A total of 4.36 trillion yuan of such bonds were issued, including 2.15 trillion yuan of special bonds.

To prevent local government debt risks, at a two-day annual meeting that concluded last week, Finance Minister Liu Kun asked local government officials to carry out debt dissolving plans "in a practical and detailed way", accelerate the market-oriented reform of local government financing platforms, most of which are indebted State-owned companies guaranteed by the local governments, and strengthen supervision to curb growth in implicit debt.

Individual investors have been allowed to buy local government bonds since March 2019, and this group accounted for 37 percent of all types of investors by the end of last year, the finance ministry said. The average coupon rate of local government bonds was 3.47 percent last year, 42 basis points lower than a year earlier, the statement said.

"With the deceleration in economic growth, policy support is still needed. We continue to expect a 20 to 30 basis points decline in the official one-year loan prime rate for this year and think the PBOC will also reduce the interest rate for its medium-term lending facilities," said David Qu, China economist of Bloomberg.

A research from Citigroup Inc said that the monetary authority is expected to keep an easing bias by maintaining a measured pace in the rate cut cycle, and policy rates, such as the medium-term funding rate, will likely drop by 5 to 10 basis points in the first quarter this year.