Regulators are giving some Chinese LGFVs and local SOEs greater access to long bonds. Previously, only large central state-owned enterprises (SOEs) could issue ultra-long bonds at tenors of 30 years or longer. Now we are seeing more long-bonds (tenors of 10 years or greater) from local government financial vehicles (LGFVs), and increased ultra-long bonds from local SOEs. The upshot for investors is they will be offered very long-dated bonds from some of China's weaker entities, presenting policy and interest-rate risks over the tenor of the instrument.
What's Happening
China is rethinking about how it uses corporate long bonds. We believe authorities are increasingly open to letting some issuers use the instrument to manage liquidity generally, and to extend maturing debt significantly.
- Wuxi Industry Development Group Co. Ltd., an industrial investment SOE, is reportedly marketing a 50-year bond.
- Several months ago, Hangzhou City Construction Investment Group Ltd., an SOE consolidating the city's utilities, public transportation, energy, and policy housing assets issued 10-year and 20-year bonds of Chinese renminbi (RMB) 1 billion, for refinancing purposes.
- Earlier this month, Chongqing Yufu Holding Group Co. Ltd. issued a RMB1.5 billion 30-year ultra-long bond.
Long bonds were previously used primarily to fund projects with long lifecycles; now it is being used more by LGFVs, largely for refinancing. About 95% of such issuance from LGFVs this year has been used for debt repayment, a sharp increase from just 32% three years ago.
Chart 1
Why It Matters
The measures are aimed at fixing liquidity strains. We believe regulators will approve more long bonds (tenors of 10 years of more) from LGFVs grappling with debt servicing. The percentage of long bonds issued (of the total LGFV long bonds issued) by LGFVs from highly indebted regions has jumped to 20% from zero over the past couple of years. In our view, use of such instruments is part of debt resolution measures that have flowed from the so-called "package of measures" policies announced in the second half of 2023 (see "China Policy Patches Alone Won't Fix LGFVs' Fraying Liquidity, Sept. 7, 2023).
As authorities give weaker entities more access to long bonds, investors will face more risks. China hasn't offered a comprehensive solution for LGFVs to deleverage, in our view. Instead, authorities are chipping away at the debt risks by extending maturities, lowering funding costs, and allowing local governments to issue bonds to settle the off-balance sheet debt held by LGFVs. Bondholders could face risks on their long-dated LGFV debt if governments reduce support for such issuers, or if interest rates rise.
What Comes Next
Many LGFVs will likely continue to face limited access to debt markets. Regulators' relaxed stance toward the use of long bonds is highly selective. It is targeted at entities in the most urgent need, we believe, to let such issuers take advantage of currently favorable market conditions. Other entities, whether more creditworthy or not, will likely have less access. For example, in the first half of 2024, only a few firms from the highly indebted regions of Guizhou and Chongqing were able to issue 10-year bonds.
Background In Brief
Authorities are using long bonds to address LGFV liquidity because the market appetite is so favorable right now. Earlier this month, an LGFV from Zunyi city issued a 10-year bond at the same level as the five-year loan prime rate, a benchmark. This worked out to a coupon of just 3.95%. A few of its peers from the same city had to pay almost double for bonds of the same tenor three years ago.
The issue from Wuxi Industry Development mentioned above, follows a 30-year, RMB1 billion bond from the same issuer that priced at a 3.23% yield earlier this month.
The current low coupons applied across much bond issuances from the sector reflects a significantly tightened LGFV bond supply, interest-rate cuts, and general government support for LGFVs, in our view.
Editor: Jasper Moiseiwitsch
Related Research
- Record Bond Rejections To Squeeze China's Lower-Tier LGFVs, April 11, 2024
- China LGFVs' Bigger Housing Role: Risk Control Matters, March 27, 2024
- Same Game, Different Name: China LGFV Issues To Repay The Debt Of A Peer, Feb. 29, 2024
- China Policy Shift May Saddle LGFVs With A Fresh Problem: Stranded Assets, Jan. 25, 2024
- China LGFVs Face Higher Liquidity Risks As Funding Channels Tighten, Jan. 11, 2024
- China Policy Patches Alone Won't Fix LGFVs' Fraying Liquidity, Sept. 7, 2023
This report does not constitute a rating action.
| Primary Credit Analyst: | Laura C Li, CFA, Hong Kong + 852 2533 3583; laura.li@spglobal.com |
| Secondary Contact: | Christopher Yip, Hong Kong + 852 2533 3593; christopher.yip@spglobal.com |
| Research Assistant: | Harry Yuan, Hong Kong |
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