Move believed to follow central authorities' intervention
East China's Jiangsu Province will relaunch a delayed bond issuance plan next week, following reports that central authorities have given approval for banks to use local government bonds as collateral for borrowing.
The provincial government plans to auction local government bonds worth 52.2 billion yuan ($8.4 billion) on Monday, with 30.8 billion yuan set to go toward paying debts that are due to mature this year, according to a document posted on the website of the China Central Depository and Clearing Co (CCDC) late on Tuesday.
The Jiangsu authorities originally planned to auction 64.8 billion yuan of local government bonds on April 23, read a statement posted on the website of the Jiangsu provincial Department of Finance on April 16. But the bond sale was postponed, without any reason being given.
"It is normal to adjust the bond issuance plan before we finally publish the information on the CCDC's website," an official with Jiangsu's finance department, who did not give his name, told the Global Times Wednesday.
But analysts believe the delay was due to weak demand for local government bonds because of their low yields and a lack of liquidity in the market.
"Banks are not so interested in buying local government bonds, and the relaunch indicates that a compromise has been reached between banks and the local government with the central bank's intervention," Yang Xiaolei, an analyst with China Securities, told the Global Times Wednesday.
Central authorities have released an "urgent" notice to local authorities, allowing banks to use local government bonds as collateral for borrowing from the central bank, according to a copy of a document acquired and posted by news portal sina.com.cn on Tuesday.
The document was jointly issued by the Ministry of Finance (MOF), the People's Bank of China and the China Banking Regulatory Commission, but could not be found on the three government institutions' websites.
Efforts to reach the three authorities failed on Wednesday. But the Jiangsu-based official confirmed with the Global Times that his office had received the document.
"The new policy is mainly aimed at facilitating sales of local government bonds, but whether it will work or not will also depend on how much liquidity the central bank can provide to banks based on the collateral," Yang said.
The MOF has rolled out a batch of measures to boost sales of local government bonds, including encouraging China's social security fund and housing provident fund to buy the bonds.
China's local government debt stood at 17.9 trillion yuan as of June 2013, and debts amounting to 1.86 trillion yuan are due to mature in 2015, according to the National Audit Office.
There are concerns that some local governments will have difficulty in repaying their debts given the economic slowdown and the real estate market downturn.
The MOF said in a statement in March that local governments would be allowed to swap 1 trillion yuan worth of maturing high-interest debts for low-yield local government bonds that can be paid back at a future date.
According to Tuesday's document, local government debt in the form of bank loans will be swapped through bilateral negotiations between local governments and banks instead of public auctions.
"The latest document confirms our view that the best approach would be a direct swap between debtors and creditors without market issuance or a large liquidity injection, as that can minimize the disturbance to the bond market and domestic liquidity," Wang Tao, chief China economist at UBS, wrote in a note sent to the Global Times Wednesday.
"Such a swap will not only lower local governments' debt service burden, but also lower potential nonperforming loans for banks," she noted.
Analysts at Minsheng Securities said the move will help stabilize growth, and played down speculation that China is implementing quantitative easing (QE) through the debt swap program.
"This is not QE, because the central bank is neither directly purchasing local government bonds nor injecting liquidity into policy banks to let them buy the bonds," Minsheng Securities said in a note on Wednesday.
