MNI: China Public Finance Firms Seen Tapping Int'l Bond Market

--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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