MNI EXCLUSIVE: China Local Govts To Boost Bond Sales: Advisors

--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%.

     --CONFIDENCE LEVELS

     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: les.commons@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: archie.zhang@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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