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--Some China LGFVs May Diversify Into Dollar Issuance
By Archie Zhang
     BEIJING (MNI) - China's local government financing vehicles are likely to
boost overall bond issuance in 2020, perhaps diversifying into dollar bonds, as
they take advantage of ample liquidity levels to boost infrastructure investment
in response to the coronavirus-driven economic slowdown, policy advisors have
told MNI.
     "It's possible that the LGFVs will sell slightly more bonds this year ...
But the volume will not increase too much as the local governments still have
pressure to control their debts, "said Yan Se, an associate professor with
Peking University and chief economist at Founder Securities.
     LGFVs issued CNY3.4 trillion bonds in 2019 and this is expected to increase
by 5% to 10% this year, with potential for expansion in regulated offshore
dollar-denominated issuance, according to Ivan Chung, an associate managing
director at Moody's Investors Service. Moody's data show that about 10% of LGFVs
in China have issued bonds overseas, accounting for less than 20% of all Chinese
corporate bonds issued outside the country by volume.
     "We had originally predicted the volume for those bonds issued by LGFVs
would sustain at or even decrease this year. But now we think the government
will likely increase infrastructure investment to stimulate the economy, thereby
increasing the funding needs of LGFVs," Chung said.
     The boost for LGFVs from the enhanced liquidity position was echoed by Guan
Qingyou, head of Rushi Research Institute, who predicted that much-needed
infrastructure investments will still pivot on roads, railroads, and airports
though many local governments are still looking to build hi-tech infrastructure
such as 5G networks.
     Rushi estimated that every percentage point increase in infrastructure
investment can result in 0.11 pp increase in GDP and China needs at least a 10%
increase in infrastructure investments this year to realize economic growth of
5% to 6%.
     Badly hit last year after a raft of technical defaults, confidence in LFGVs
recovered somewhat after local governments met their obligations, and has
strengthened further this year, according to a bond trader with a state-owned
securities company.
     "LGV bonds sell pretty well in the market. People just treat them the same
as bonds directly issued by the government" he said.
     The coupon spread between average AAA LGFVs and AA LGFVs is around 150 bps
this year, down from 195 bps in 2019, according to MNI research based on data
provided by Wind Information.
--MNI London Bureau; tel: +44 203-586-2225; email:
--MNI Beijing Bureau; +86 (10) 8532-5998; email:
--MNI London Bureau; +44 203 865 3829; email:
[TOPICS: M$A$$$,M$Q$$$,MC$$$$,MT$$$$,MX$$$$,MGQ$$$]