The change comes after overwhelming demand saw recent local government bond issues massively oversubscribed, underscoring both their distorted pricing and the market’s appetite for high-quality debt as Beijing relaxes monetary conditions.
The sources said local governments would be able to issue bonds at a minimum spread of between 25 and 40 basis points over central government bonds of the same maturity.
Previously, local governments were required to issue bonds with a minimum spread of 40 basis points over equivalent Chinese treasury bonds.
“The previous minimum spread did not reflect the market,” said a trader at an Asian bank based in Shanghai.
She added that while some traders were initially confused by the rule change, it effectively means a reduction in the minimum spread to 25 basis points.
Xinjiang, an autonomous region in northwest China, issued the first local government bonds of 2019 on January 21, kicking off total local government bond issuance of ¥129.6 billion ($19.22 billion) last week, according to Reuters’ calculations. A further ¥288.4 billion worth of local government bonds are due to be issued this week.
The record pace of issuance of normal and special-purpose bonds means local governments will in just two weeks use up 30 percent of the total 2019 quota for new local government bond issuance approved by the State Council late last year.
Beijing has encouraged local governments to issue bonds in the face of a sharp slowdown in infrastructure investment, with a multi-year crackdown on speculative debt constraining some governments’ finances.
Analysts expect China to let local governments issue ¥2 trillion in special-purpose bonds this year, up from ¥1.35 trillion last year. Special-purpose bonds are excluded from the official budget.
But demand has more than kept up with supply, suggesting in part that local governments have been forced to pay too much to issue debt. Three separate bonds issued by the Fujian provincial government last week were oversubscribed by more than 53 times, according to traders.
Bonds issued on Tuesday by the Jiangxi provincial government were priced at the new minimum spread of 25 basis points, but still had bid-to-cover ratios in the 20s and 30s.
“There’s too much money, and nowhere to invest it,” said a Shanghai-based asset manager.
A Shanghai-based senior trader said that from the point of view of banks, local government bonds had the same risk profile as Chinese treasury bonds — but due to ‘guidance’ by regulators, yields are by definition higher, making them more attractive investments.
Local government bond issuance typically begins in March after quotas are approved at the National People’s Congress. But faced with a slowing economy, authorities have brought issuance forward to spur investment.
At least 23 Chinese provinces have cut their economic growth targets for this year as weaker domestic demand and a trade dispute with the US weigh on growth.