MNI: China Govt Bond Issuance Pressure High in 2018: Analysts

     BEIJING (MNI) - New supply will continue to put pressure on the domestic

bond market next year, as both Chinese central government and local government

bond issuance will increase, Chinese analysts say.

     Chinese investors remain cautious about their demand for bonds next year

because of what they expect to be a stricter regulatory environment and a

continuation of a neither-tight-nor-loose monetary policy. If this means bond

demand does not increase next year, then increased supply would mean lower

prices and higher yields.

     --HIGHER DEFICIT, MORE CGBS

     The issuance of China government bonds (CGBs) is relatively easy to

predict.

     "Internationally, 3.0% is the red line for the budget deficit [to GDP]

ratio and in the past two years the budget deficit ratio in China has been

3.0%," analysts at Everbright Securities said in a report on Tuesday. "So we

expect the budget deficit ratio to remain at 3.0% next year."

     Assuming GDP growth of 6.5% next year and a GDP deflator around 3%, then

the total budget deficit, including both central and local government budgets,

will be CNY2.7 trillion, larger than the CNY2.38 trillion this year, Everbright

estimated.

     If the central government's share of the deficit is 65%, with local

governments accounting for the rest -- the same shares as in past two years --

then the central government fiscal deficit will be CNY1.75 trillion and the

aggregate local government fiscal deficit will be CNY950 billion next year. 

     Around 90% of the CNY1.75 trillion deficit will be covered by CGBs issued

to financial institutions.  The new CGB would amount to around CNY1.6 trillion,

higher than CNY1.4 trillion issued this year. 

     --MORE SPECIAL LOCAL GOVERNMENT BONDS

     General local government bonds new issuance will amount to CNY950 billion

next year to cover their budget shortfall.

     In addition, local government will issue special bonds, including bonds

issued to finance specific projects, which are not included in local government

deficit figure but recorded individually and still limited by central

government. The scale of these special bonds has increased rapidly during the

past three years, from CNY100 billion in 2015 to CNY400 billion in 2016 and to

around CNY800 billion this year.

     "Given the Ministry of Finance (MoF) sought to prevent local government

debt risks and imposed severe restrictions on public-private partnerships (PPP)

projects, the MoF might allow an increase in the size of special bond issuance

[next year] to give local governments a transparent and legal way to raise debt

to support economy growth," analysts at China International Capital Corp. (CICC)

said in a report published during the weekend. "So we expect such [special] bond

issuance will amount to around CNY1.3 trillion next year."

     The amount of local government bonds issued to roll over expiring local

government debt will likely amount to around CNY1.5 trillion, CICC analysts

added.

     As part of the debt-for-bond swap program begun in 2015, a total of

CNY14.34 trillion of local government debt were scheduled to swapped by the end

of the program in August 2018. Given that the amount of bonds that have already

been swapped amounted to CNY3.21 trillion in 2015, CNY4.87 trillion in 2016 and

around CNY2.9 trillion this year, with already-reduced debt amounted to CNY1.86

trillion in total, the remainder of local government bonds that mature amount to

CNY1.5 trillion, the same as the amount of debt that still needs to be swapped

next year.

     Moreover, a document issued by MoF in August stated that local governments

can issue special bonds as long as the amount does not exceed the local

government's bond issuance quota, which was not allowed before. As of the end of

2016, the quota for local government special bonds was CNY6.47 trillion, while

outstanding special bonds only amounted to CNY5.53 trillion, enabling local

government to issue up to about CNY940 billion in additional special bonds next

year.

     "The CNY938.9 billion (quota minus outstanding) actually gives local

governments more flexibility to issue bonds. If a local governments has a

profitable project on hand, it can apply to the MoF to issue a bond using part

of the [remaining] quota," analysts at the CICC said. "Given other funding

channels have been severely restricted, local government are likely to use this

part of quota to raise funding."

     "However, because the [MOF] document came out relatively late this year,

and the MoF needs to explain to local governments how to interpret the rules,

and applying [for permission to issue a special bond] also requires time, local

governments will not be able to take good advantage of this part of the quota

this year," the CICC analysts continued. "But we expect local governments to

make better use of the remaining part of the quota next year."

     A reasonable estimate is that local governments will issue around

CNY300-400 billion in special bonds using the remaining of quota, analysts at

the CICC said.

     --TOTAL NEW ISSUANCE

     Therefore, the net issuance of local government bonds will be around CNY4.1

- 4.2 trillion next year, slightly lower than the CNY4.5 trillion this year,

mainly because of the lower issuance of local government bonds to be swapped for

outstanding debt.

     But taking out the rollovers of existing bonds, since they do not affect

new supply, net new issuance of bonds is expected to amount to CNY3.4 trillion

this year. And if we assume the same ratio of targeted bonds replacement for

next year, then net new issuance will amount to CNY3.57 - 3.67 trillion, higher

than this year.

     "Therefore, the supply pressure from local government bonds next year will

be no less than this year," the analysts at CICC concluded.

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

[TOPICS: M$A$$$,M$Q$$$,M$$FI$]