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Chinese LGFV Bonds Rally After Beijing’s Funding Pledge

Red flags fly at Tiananmen Square in Beijing, China, on Wednesday, July 10, 2024. The Third Plenum, set for July 15-18, is one of the most important political meetings of the Chinese Communist Party. It's expected to unveil a series of economic reforms and policies aimed at addressing long-standing issues that have impeded growth and recovery. Photographer: Na Bien/Bloomberg (Na Bien/Bloomberg)

(Bloomberg) -- Bonds issued by China’s local government financing vehicles rallied after the finance ministry pledged to make the largest effort in years to swap off-balance sheet debt.

Yields on AAA rated LGFV debt traded on the onshore market have fallen by around 10 basis points Monday morning on average, according to credit traders. The yield on a 2.86% 2029-due bond sold by Tianjin Infrastructure Construction & Investment Group slid by as much as 31 basis points, two traders added.

China plans to borrow more to raise money and help local governments finance their off-balance-sheet borrowing, Minister of Finance Lan Fo’an said during a Saturday briefing. While Lan didn’t provide a specific amount, he said the size of the one-off effort to raise the local government limit to swap hidden debt will be the “largest in recent years.”

The initiative adds to Beijing’s heightened efforts to address local government borrowings, which have become an albatross in the country’s struggles to revive its economy heavily dependent on construction and property development. In a 2023 survey, international investors flagged local government debt as the number one financial risk in Asia. 

READ: China Shores Up Property Sector, Signals More Spending Is Coming

About a year ago, policymakers introduced a special program to allow provincial-level governments to raise 1 trillion yuan ($141 billion) via bond sales to repay off-balance sheet debt. The central bank also vowed to provide emergency liquidity support to heavily indebted local governments as needed.

From 2015 to 2018, the government allowed large-scale local government debt swaps totaling over 12 trillion yuan, UBS economists including Wang Tao wrote in a note. That was followed by a more modest round from 2023 to 2024, they said. 

With regulators’ push get leaner, China’s LGFVs are chipping away at their debt. Their net financing — new yuan bond issuance minus maturities — in the second quarter came in at negative 179 billion yuan, marking the third consecutive quarter of net outflows. 

Despite global investors’ concerns, LGFV debt has been popular among yield-searching bond buyers onshore, pushing borrowing costs to record lows this year. 

©2024 Bloomberg L.P.