A US$5.9b market in China is finally getting some attention

[HONG KONG] It's been a long time coming, but bonds of debt-ridden borrowing units set up by China's local governments are finally winning the hearts of international investors.

Global investor participation in US-dollar bonds of local government financing vehicles (LGFVs) has increased in recent months, spurred by greater familiarity with the asset class, according to Standard Chartered, one of the top bond underwriters in Asia ex-Japan.

The growing issuance of these high-yielding securities means if one wants to beat the regional bond benchmarks, they cannot ignore them, said Alan Roch, its head of Asia bond syndicate.

Foreign buyers are "coming quicker with larger orders compared with previous years, and they've shown more flexibility on pricing as well", Mr Roch said, referring to LGFV offerings this year.

While the shift in sentiment is a boon for LGFVs tasked with funding government infrastructure projects, increased exposure to LGFV bonds means overseas investors are also on the hook for potential defaults if government support wanes for the sector. It was just two years ago when LGFV debt was at the bottom of everyone's wish list as the deleveraging campaign intensified.

The strong demand has contributed to a record high issuance of greenback notes from LGFVs at US$5.9 billion so far this year, up from US$4.8 billion for the year-earlier period, Bloomberg-compiled data show. The domestic LGFV bonds have also been sought after by local investors because of their track record of zero defaults.

Jiangxi Railway Investment Group and Wuxi Construction and Development Investment, two investment-grade LGFV borrowers, attracted orders over 10 times the size of their bond offerings this year.

Such notes issued this year are handing investors an average coupon of 5.3 per cent, compared with a 3.8 per cent from overall Asian investment-grade issuers, data compiled by Bloomberg show.

"Judging by the dynamics in primary books, I believe there is further scope for LGFV bonds to rally," Mr Roch said.

Earlier in March, China relaxed bond issuance rules for the debt-ridden local units as they face a record amount of maturities this year. LGFVs were set up during the global financial crisis to revive growth through infrastructure development.

These bonds are "prime assets investors need to consider buying if they want to outperform" indices, partly due to their yield appeal, Mr Roch said. "Most investors have realised the implications for the market and for the indices they are tracking."

BLOOMBERG