(Yicai Global) June 4 -- Chinese regions issued CNY109.8 billion (USD17.2 billion) in municipal bonds last month, hitting a three-year low, amid strengthening regulation.

The new muni bonds resulted in a negative balance of CNY132.8 billion for the regional administrations, the first figure below zero since October 2018, according to a research institute under Kaiyuan Securities.

The declining sum is likely to be directly related to the stricter bond issuance requirements and review, said Zhao Wei, chief economist at Kaiyuan Securities.

Local governments are less willing to borrow money to take control of their debts, and some areas have recently increased their supervision of platform financing, which is likely to impact the muni market, said Zhao. The decline is particularly apparent in high-risk areas, the chief economist added.

Another expert agreed. Borrowing is decreasing as China has recently sought to dissolve its regions' hidden debts, Luo Zhiheng, vice director of a research institute affiliated with Yuekai Securities, said to Yicai Global.

This year, the value of new muni bonds will total between CNY2.8 trillion and CNY3.4 trillion (at least USD437.2 billion). The balance will stand between negative CNY546.9 billion and CNY6.5 billion (USD1 billion), Luo added.

Urban Investment Bonds

The regulatory oversight targets urban construction investment firms, major financing vehicles for local governments. Urban investment bonds pose default risks due to their weak profitability, said Luo.

Urban investment companies have poor liquidity and therefore rely on local governments’ implicit guarantees, said Luo. This is why regional administrations' financial condition has become a major concern, the vice director added.

Muni categories were narrowing in May. The share of bonds issued via private placement fell by more than 5 percentage points from a year ago. No corporations were on the list of issuers.

The inflows are shrinking due to a recent ban. Issuers of urban investment bonds need to prove that the proceeds are not used to repay regional governments’ implicit debts, the Shanghai and the Shenzhen stock exchanges wrote in a document in late April.

Some governments are facing great debt pressures but the broader explicit status appears to be under control, Luo added.

Editor: Emmi Laine, Xiao Yi