China’s ‘Crazy’ Local Government Bond Sale

Jun 23, 2014

China’s ‘Crazy’ Local Government Bond Sale

China’s bond markets turned a little strange Monday.

In a first for China, local government Guangdong Province sold debt in its own name, and surprised markets when the yields were lower than that sold recently by the central government. That’s unusual as investors would normally demand a higher return from a riskier issuer.

Guangdong Province sold five-year bonds, part of its planned 14.8 billion yuan ($2.4 billion) issuance, at 3.84% and lower than the 3.99% on a sale of bonds by the finance ministry earlier this month that were issued on behalf of local governments.

“It’s crazy that the Guangdong bonds were sold at yields similar to the central government bonds, (when they) definitely have higher risk and poorer liquidity,” a Shanghai-based foreign bank trader says.

So why the surprise? The Guangdong bonds were rated as AAA, the highest credit rating in China, by Shanghai Brilliance Credit Rating & Investors Service Co. The agency said the rating was based on the slow growth of the province’s debt and the high liquidity of its fiscal funds.

But traders also say local governments tend to deposit their tax revenues with banks in their own regions, so the lenders may be keen to buy the debt so they keep receiving the large pools of deposits.

Aiming at a more transparent borrowing model, China introduced the pilot program last month to allow Guangdong and other nine provinces and cities to issue bonds directly. Since their first bonds will have just a combined volume of around 100 billion yuan this year, it’s easy for the country’s large bond market to absorb them without asking for too high yields.

“It also shows that Chinese investors don’t know how to price the risk since we have limited experience in defaults,” said Chen Long, an analyst with Bank of Dongguang. China witnessed the first domestic bond default in March, when Shanghai Chaori Solar Energy Science & Technology Co. failed to pay most of an interest payment.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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