SHANGHAI / HONG KONG, March 3 (Reuters) – Yield-hungry Chinese investors rush into avoided local government finance bonds, wagering that Beijing will not allow such state-owned companies to go bankrupt when they are needed to help stem the economy virus.
So-called local government financial vehicles (LGFVs) flourished after the 2008 global financial crisis as a way to finance the infrastructure boom in China.
But the bonds fell out of favor as Beijing stepped up the crackdown on local government indebtedness in 2016 after banning the authorities from offering implicit guarantees to the LGFVs.
“The economy is in bad shape, so the government needs to increase investment in infrastructure,” said Xiaofang Liu, director of research at Shanghai Fengshi Asset Management. “This reduces the risk of failure of the LGFVs because they are necessary to finance such projects.”
Seven provincial broadcasters have announced plans to invest in infrastructure worth 25 trillion yuan ($ 3.58 billion), according to state television CCTV.
Yields on onshore three-year bonds sold by LGFVs with AA ratings dropped by more than 40 basis points on average in the past month, more than the 19-point drop in central government bond yields , according to official data.
Even bonds issued by LGFVs based in the epicenter of the Wuhan virus, including Wuhan Hongshan Urban Construction Investment and Wuhan Real Estate Development and Investment Group, saw their yields drop. A Wuhan real estate bond maturing in April this year saw its yield drop by more than 50 basis points since February to 2.48%.
Some LGFVs are already receiving direct support from Beijing.
The industrial investment group in Nanyang, in central Henan province, has obtained 500 million yuan in loans from the Chinese political bank China Development Bank (CDB) to fight the virus. The CBD also provides 120 million yuan in emergency loans to Ganzhou City Investment Group, another LGFV in Jiangxi province.
According to Moody’s, around 1.7 trillion yuan (243.90 billion US dollars) of LGFV onshore bonds will mature in 2020.
The rating agency added that if the epidemic was negative for bond credit quality, Beijing’s easing measures and investors’ new preference for LGFV bonds meant that they were not immediately confronted with a refinancing risk.
SPLIT PRIVATE STATE
However, investors’ renewed enthusiasm for state-guaranteed bonds has come at the expense of private companies, highlighting the challenges Beijing faces in advancing long-term structural reforms, including public sector deleveraging. inflated.
Switching to state-supported investment would also increase the cost for non-state borrowers, even if the Chinese central bank has injected cash and cut key interest rates as part of its efforts to stem the economic impact of the coronavirus epidemic.
The highest ranking LGFV officers are “usually strategically important names, who will benefit from any government incentives,” said Avinash Thakur, originator of Barclays’ debt for the Asia-Pacific region.
But their weakest peers may need more caution.
For other types of public enterprises and financial institutions, “government support is very explicit,” said Owen Gallimore, head of credit strategy at ANZ in Singapore.
“Their access to cheap and liquid financing is revealing. This support is much less certain with LGFVs. ”
Some local governments and LGVF are already sitting on massive amounts of hidden debt, which S&P Global Ratings estimated in 2018 could reach 40 trillion yuan. ($ 1 = 6.9798 Chinese yuan renminbi) (Report by Samuel Shen and Noah Sin; Editing by Jennifer Hughes and Kim Coghill)
