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--Foreign Demand for Bonds By Former Local Gov't Financing Vehicles Seen Strong
--Given Huge China Local Infrastructure Funding Need, Large Issuance Expected
MNI: China Public Finance Bonds Seen Drawing Overseas Demand
     BEIJING (MNI) - Bonds issued by Chinese public finance companies, including
some transformed from local government financing vehicles (LGFVs) and local
government rail companies, will become a major issuer class in international
bond market as they seek to diversify their funding sources for future
infrastructure projects, a Moody's analyst said Tuesday.
     Public finance issuers, which are mainly local governments and state-owned
companies carrying the mandate of local governments to finance major
construction projects, are projected to be more active in overseas market given
the simplified regulatory process to issue offshore bonds and their massive
funding needs, Ivan Chung, head of Moody's Greater China Credit Research and
Analysis, said at a credit outlook conference here co-hosted by Moody's
Investors Service and China Chengxin International Credit Rating Corporation.
The move is expected to offer more diverse investment opportunities to foreign
investors.
     As China increasingly opens it financial markets and allows Chinese
entities to deepen their involvement in international markets, financing needs
will increasingly be met by overseas investors, Chung said. Because of the
expected continued strong demand for funding local infrastructure projects
throughout China, Bonds issued by public finance companies, mainly local and
state-owned companies carrying out the mandate of local governments to finance
major construction projects, will become a major bond category in international
markets, joining bonds issued by Chinese state-owned enterprises (SOEs) and
property developers, Chung said. Both Chinese SOEs and property developers are
major issuers of U.S. dollar bonds in the Asian market.
     The change is also due to tightening liquidity in the domestic bond market
and policy changes which restrict local governments from directly providing
support to LGFVs,  resulting in wider credit differentiation among LGFVs with
different fiscal backing. 
     Under China's 13th Five-Year Plan that runs from 2016 to 2020, the
infrastructure financing needs of local governments and LGFVs -- many of which
are thought to be continuing to finance local government projects in secret --
is still huge. According to data from the National Bureau of Statistics, the
State Council and the official Xinhua News Agency, at of the end of last year,
26,000 kilometers of rail and 2,805 kilometers of subway projects need to be
completed by the end of 2020. At the same time, the urbanization rate is
targeted to rise to 63% from 57% at of end 2016. Chung noted local rail and
subway investments will total around CNY800 billion next year and will be at
least that large in 2019 and again in 2020. 
     LGFVs that focus on financing local governments' strategically important
infrastructure projects, are under higher-level governments (provincial capital
city or province) or are tied to cities where economic fundamentals are strong,
would be able to receive more resources to transform into state-owned
enterprises providing public services, which will facilitate their access to
bond markets, Chung said. Such LGFVs will continue to be very active in the
international bond market, he said.
     Since Chinese companies building municipal subway systems have successfully
issued bonds overseas, local subway investment companies and even China's major
railway construction firm, China Railway Corporation, are likely to make the
most use of overseas financing, Chung said. Some local governments and entities
involved in the construction of high-profile projects, such as the Xiong'an New
District outside Beijing, could also successfully tap the international bond
market.
     Chung noted the room for Chinese companies to transfer their bond issues
from the domestic to the overseas market is huge, given only 11% of bonds issued
by Chinese companies in the first three quarter this year were issued overseas.
     "The previous regulatory restrictions for offshore bond issuance have been
reduced," Chung said. "Given China has set the goal to internationalize its
capital market and the yuan, it's not likely it will reverse its policy to allow
expansion of overseas financing."
--MNI Beijing Bureau; +86 (10) 8532-5998; email: iris.ouyang@marketnews.com
--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com
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