Shanghai moves closer to bond sale
Shanghai has named three major underwriters for a multibillion-yuan bond sale this month amid a financing shortfall for infrastructure projects.
Bank of Communications and Bank of Shanghai, both headquartered in Shanghai, and Beijing-based China Development Bank have been appointed to help underwrite the debt sale in less than three weeks, according to three bankers with direct knowledge of the deal.
The State Council, for the first time in 17 years, allowed four local governments to sell bonds directly under a pilot scheme.
Shanghai is leading the move to conduct the bond issuance and subscriptions are expected to begin in the coming week.
The Shanghai Finance Bureau, which is in charge of the bond offering, was not available for comment yesterday.
Beijing picked Shanghai, Guangdong, Zhejiang and Shenzhen late last month to launch direct sales of local government bonds.
Since 1994, local governments have been barred from raising funds through direct bond issuance while the finance ministry has been selling bonds on their behalf with a full sovereign guarantee.
The problem of souring loans to so-called local government financing vehicles has prompted the central government to lift the restrictions in order to boost the coffers of local governments.
The local governments had outstanding liabilities of 10.7 trillion yuan (HK$13 trillion) at the end of last year, most of which were borrowed through the financing vehicles from banks to replenish public works.
The easy credit associated with Beijing's infrastructure-focused stimulus package in the past two years led to a rise in bad loans because local governments recklessly sought funds for potentially unprofitable or redundant projects.
Most of the funds borrowed from banks were short-term loans, but the failure of the government projects to generate enough cash meant the banks could not be repaid.
Beijing is attempting to let local governments use the three and five-year bonds to tackle their cash-flow problem when the short-term loans come due.
The proceeds would be used to repay the short-term loans owed by the government financing vehicles with the local governments then paying back the principal and interest when the new debts mature.
Economists estimated that banks would be the main buyers of the debt but warned that the risks were high since the amount of questionable loans would not be cut.
'Banks will most probably be the main buyers of the local debt,' said Galaxy Securities chief economist Zuo Xiaolei. 'The risks will be the same as before since banks are still exposed to high risks of defaults.'
The State Council selected the more affluent regions to sell the bonds because it believed their financial strength could cover the debts, economists said.
'It is expected that the central government will expand the pilot scheme when it turns out to be successful,' said Gu Weiyong, the chief investment officer at Ucon Investment Management.
'Despite monetary tightening, the market still has plenty of cash-rich investors with an appetite for low risk and they will be interested in buying the bonds.'
State-owned China Securities Journal reported yesterday that the Shanghai government would sell a combined 7.1 billion yuan of bonds in equal amounts of three and five-year bills.
Bankers said the city government nominated two Shanghai-based lenders to be the major underwriters in order to increase their income.
Apart from the three key underwriters, about 20 institutions will join the underwriting team to ensure the bond offering goes smoothly.