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
KB Kee is the Managing Editor of the Moat Report Asia (, a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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