(Yicai Global) Dec. 20 -- As the latest addition to China's local government bond market, Shenzhen has successfully issued a special rail transport bond, blazing a trail for local governments seeking funding for pricey mass rail transit projects.

The cost of construction of metro line number 14 in the city is projected at CNY40 billion (USD6 billion). The Shenzhen government will cover roughly half the investment with public finance, and the remaining CNY20 billion will come from sales of special bonds in annual tranches.

Principal and interest will be paid using revenues from subway operations and superstructure development along the rail line.

The first tranche of the five-year special bonds worth CNY2 billion was successfully issued via the government bond issuance system at the Shenzhen Stock Exchange. As the first self-financing project-specific bond issue by a local government, the issue was oversubscribed by 4.38 x among members of the underwriting syndicate, and the interest rate was settled at the lower limit the bid inviter set, 3.82 percent -- close to the yield on five-year Treasury bonds.

"It means that the Shenzhen government got the money at a bargain price, considering the cost of borrowing from banks typically ranges between 6 and 7 percent, and financing from other sources can be more expensive. Building a subway line entails large amounts of investment, and bond-based financing is significantly cheaper than other funding channels for local governments," Wen Laicheng, president of Zhongcai-Pengyuan Local Finance Investment and Funding Research Institute, told Yicai Global.

The bond was issued following offers of land reservation and government toll road special bonds, indicating that the boundaries of the Chinese government bond market continue to expand. Other local governments will follow suit and offer special bonds to fund mass rail transit projects. The municipal rail project bond financing market is thus set to grow further.

The central government has tightened debt management regulation over local governments this year. The Ministry of Finance has shut the door on gray or back-door financing channels such as local government financing vehicles, public-private partnerships and government service procurement. Active efforts have gone to facilitate bond financing as the only legitimate channel for local governments to fund municipal development initiatives.