Retail sales of local government bonds attract eager investors

Chinese local government bonds worth 1.4 billion yuan ($208.5 million) were snapped up by retail investors within a single day, after counter sales in banks were made available for the first time. The fundraising will help supplement a broader fiscal deficit this year, analysts said.

On Monday, individuals in China were able to purchase bonds issued by the Zhejiang provincial government (five-year term, 3.32 percent coupon rate) and the Ningbo city government (three-year term, 3.04 percent coupon rate). Proceeds from the sales will be used for land purchases (300 million yuan) and shantytown renovations (1.1 billion yuan), according to a notice on the website of China Central Depository and Clearing, a clearinghouse under the central bank.

The minimum investment amount for retail investors is 100 yuan, lower than most wealth management products issued by commercial banks. Previously, individual investors could only purchase bonds issued by the central government, known as treasury bonds. And before Monday, local government bonds were traded mainly in the interbank market.

According to the Ministry of Finance, local governments in Sichuan, Shaanxi and Shandong provinces as well as Beijing will eventually be able to sell bonds at counters in commercial banks directly to retail investors, and the practice will be expanded nationwide after an additional period of time.

The ministry said individuals do not need to pay taxes on the bonds' interest income, and this policy is likely to attract more investors.

Selling local government bonds to retail investors should facilitate liquidity in the secondary market, improve the market-oriented bond pricing mechanism and push issuers to enhance the quality of information disclosure, said Amanda Du, a Moody's vice-president and senior analyst.

"Higher coupon rates compared with treasury bonds, and the tax exemption on the interest income, make local government bonds more attractive for retail investors," she said. "The fast takeup by retail investors also indicates that the bonds have won high recognition among individual buyers, supported by the local governments' high credit ratings."

Currently, all special purpose local government bonds are domestically rated "AAA", the safest level. The sale to individual investors is mainly of project-linked special-purpose bonds, a type of local government bond vigorously promoted by the government in recent years. The cash flows generated from the underlying projects will be used as the primary repayment sources.

In China, there are two types of local government bonds: general bonds and special purpose bonds. According to the country's 2019 budget report, which was approved by the top legislature earlier this month, the budgeted deficit for local governments is 930 billion yuan, up 100 billion yuan compared with 2018, and this fund gap will be supplemented by general bonds.

In the meantime, 2.15 trillion yuan of special purpose bonds will be issued to support large infrastructure projects, such as shantytown renovation projects and railways, said the ministry.

Letting individual buyers invest in local government bonds is a way to narrow the government's financing gap, said Hu Yijian, a tax professor at Shanghai University of Finance and Economics. The gap is expected to expand, as policymakers decided to cut about 2 trillion yuan in taxes and fees this year while at the same time increase spending on investment.

Finance Minister Liu Kun said at a forum on Sunday that the government plans to accelerate local government bond issuance this year. "We are trying to complete the issuance of the new bond quota of 3.08 trillion yuan by the end of September."

"We will urge local governments to inject funds into projects quickly in order to stabilize investment and expand domestic demand," said Liu.

In the first two months, issued local government bonds totaled at 782.1 billion yuan. Among this, 326.1 billion yuan was raised through special purpose bonds, a type just like United States municipal bonds, the ministry said.