90% drop in Chengtou notes issuance

Bonds issued by local-government financing vehicles (LGFVs) plunged more than 90 percent in Jan as the market became increasingly wary over the creditworthiness of the quasi-government debt.

In the first half of Jan, only 4 LGFVs issued their bond with a total value of 4.7 billion yuan ($758 million), more than 90 percent lower than the same period in Dec, according to Wind data. Last Dec 56 LGFV bonds, also known in China as "chengtou notes", were issued with combined value of 72.9 billion yuan.

The drop in chengtou note was dramatic. In the first half of 2014, monthly issuance of chengtou note reached 153.5 billion yuan.

This sharp decline came as town halls are backing away from blanket no-default guarantees and trying to replace the quasi-government bond with real government bonds directly issued by local governments.

Late last month the regional authorities in Shandong became the first to declare they would not bail out defaulting cities or counties in the province. Two city governments in Jiangsu and Xinjiang have also pulled support for their financing vehicles' planned debt sales.

As a result, yield premiums on one-year AA notes, the most common ranking for such issuers, jumped a record 98 basis points in December.

In terms of securities type, the four products sold in Jan concentrated on commercial papers and medium-term notes, which are easier to get approval from the regulator. Corporate bonds and private publication notes, which were popular before, saw no new issuance.