Slump in Local Government Bond Issuance Results From Decline in Debt Swap, Proactive Debt Reduction
Shen Weijia
/SOURCE : Yicai
Slump in Local Government Bond Issuance Results From Decline in Debt Swap, Proactive Debt Reduction

(Yicai Global) July 14 -- The total size of China's local government bond issues almost halved in the first half of the year compared with the same period last year. It is attributable to a decline in the amount of debts to be replaced and proactive debt reduction by local governments, said an official at the Ministry of Finance.

In the first half, the total volume of local government bond issues totaled CNY1.86 trillion (USD275 billion), a decrease of almost 50 percent from CNY3.58 trillion recorded for the same period last year, data from Wind show.

China's primary bond market has gone through some major structural changes in the first six months this year, said Lou Hong, a treasury inspector at the ministry of finance, during a press briefing today.

The ministry set the debt replacement quotas to be CNY3.2 trillion and CNY4.9 trillion in 2015 and 2016 respectively, Lou said. The new bonds issued were used by local governments to repay principal of maturing debts. From this year on, the total volume of local government debt replacement will be significantly reduced, hence the substantial fall in new bond issues relative to last year.

Furthermore, local finance departments have proactively adjusted the pace and rhythm of bond issuance in line with the central government's requirements, he added. For example, some local governments cut the size of bond issues in late June, with guidance provided by the finance ministry.

The average local government bond interest rate at issue was 3.85 percent in the first half, up 82 basis points from a year earlier. The fall in bond interest rates has been caused by higher interest rate parity on the global market following the two rate hikes by the Federal Reserve, which placed a certain degree of upside pressure on financial market rates in China, he explained.

Overall, Chinese bond interest rates have so far gone up this year, he continued, and yields on book-entry treasury bonds averaged 3.51 percent at the end of last month, up 84 and 61 basis points compared with those recorded for late June and late December last year, respectively.

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Keywords: Ministry of Finance , Local Debt , Replacement , Market , Bonds , Interest Rate , GOVERNMENT , Debt