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Free AccessREPEAT: China Govt Bond Issue Pressure High in 2018: Analysts
Repeats Story Initially Transmitted at 06:24 GMT Dec 14/01:24 EST Dec 14
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
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.