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16 Mar 2015
China: MoF’s debt replacement program to push down yield curve – Nomura
FXStreet (Barcelona) - Asian Economists at Nomura, comment on China MoF’s decision to replace the existing LGFV debt which is scheduled to mature this year by issuing local government bonds.
Key Quotes
“The Ministry of Finance (MoF) issued a press release in the form of a Q&A on its website yesterday to clarify the recently announced local government debt replacement program. The program allows local governments to issue bonds to refinance debt that was issued through local government financing vehicles.”
“According to the press release, the MoF has approved a RMB1trn local government bond issuance quota for this year to replace the LGFV debt that is scheduled to mature this year and the program will only apply to debt that was directly borrowed by local governments.”
“We see two main implications on the economy from this program. First, it will help mitigate systemic financial risks. The upcoming local government bonds will be issued by provincial governments or governments of cities listed independently in the state plan. The credit ratings of these local governments should be much higher than those of the LGFVs.”
“Moreover, under the current administrative and fiscal setup of the Chinese government, local government debt is generally considered as having an implicit guarantee by the central government, which is why current local government bonds can be issued at a rate close to those of treasury bonds.”
“Second, this program will reduce the financing costs of local governments and push down China’s yield curve, as the program replaces the current high-yield LGFV debt with lower yielding bonds.”
“However, the yield curve could steepen as the supply of longer-term local government bonds increases. Current local government bonds usually have a tenor of five and seven years, which is longer than the usual tenor of LGFV debt (1-3 years).”
Key Quotes
“The Ministry of Finance (MoF) issued a press release in the form of a Q&A on its website yesterday to clarify the recently announced local government debt replacement program. The program allows local governments to issue bonds to refinance debt that was issued through local government financing vehicles.”
“According to the press release, the MoF has approved a RMB1trn local government bond issuance quota for this year to replace the LGFV debt that is scheduled to mature this year and the program will only apply to debt that was directly borrowed by local governments.”
“We see two main implications on the economy from this program. First, it will help mitigate systemic financial risks. The upcoming local government bonds will be issued by provincial governments or governments of cities listed independently in the state plan. The credit ratings of these local governments should be much higher than those of the LGFVs.”
“Moreover, under the current administrative and fiscal setup of the Chinese government, local government debt is generally considered as having an implicit guarantee by the central government, which is why current local government bonds can be issued at a rate close to those of treasury bonds.”
“Second, this program will reduce the financing costs of local governments and push down China’s yield curve, as the program replaces the current high-yield LGFV debt with lower yielding bonds.”
“However, the yield curve could steepen as the supply of longer-term local government bonds increases. Current local government bonds usually have a tenor of five and seven years, which is longer than the usual tenor of LGFV debt (1-3 years).”