Low-rated China LGFV bonds’ spreads narrow on improving outlook
SPREADS for low-rated Chinese local-government financing vehicles’ notes are narrowing to near a record, reflecting investors’ improving outlook that the nation’s measures to support debt-laden provinces may bear fruit.
The yield premium for one-year AA-rated LGFV yuan bonds over comparable central government notes fell to 110 basis points this week, its tightest since a record low of 109 in 2016, according to Bloomberg-compiled data.
LGFVs, used to fund infrastructure development, have been under investors’ scrutiny as local governments face fiscal difficulties brought on by sliding land sales and debt-heavy projects failing to generate sufficient revenues. The latest price moves relieve some pressure for local governments as new supportive measures and financing sources are phased in.
Yields for the LGFV bond class have fallen more than 2 percentage points from their peak to 3.29 per cent, while recent weakness in Chinese sovereign debt has accelerated – further cutting spreads. As of mid-afternoon on Wednesday (Nov 22), 1-year government bonds’ yields climbed more than 10 basis points.
The country’s economic slowdown, weak consumer demand and falling property prices also have contributed to local governments’ malaise. But worries about cash-strapped LGFVs have recently eased as help trickles in – resulting in record demand for some new LGFV debt.
Beijing recently allowed provincial-level governments to raise about 1 trillion yuan (S$188.3 billion) via bond sales to repay LGFV and other off-balance sheet issuers, Bloomberg reported in August.
“When it’s necessary, the People’s Bank of China will provide emergency liquidity support to regions with a relatively heavy debt burden,” central bank governor Pan Gongsheng said in a speech at the Financial Street Forum in Beijing earlier this month.
China’s financial regulators also recently told its policy banks and biggest lenders to issue new loans to cover offshore debt issued by local governments maturing this year and in 2024. BLOOMBERG
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