China’s Bocom says it will buy 7 per cent of local government bond issues this year
Bank of Communications (Bocom) pledged to buy up to 7 per cent of all mainland local government bond issues this year, as a central government plan to get indebted localities to swap their loans into bonds gathers pace.
The announcement by the mainland’s fifth largest bank came as finance ministry figures on Wednesday showed the gross balance of local government debt would reach 10.7 trillion yuan (HK$12.9 trillion) this year, up from an estimated 9.9 trillion yuan in 2015, in spite of efforts to keep it down.
Local governments will owe another 6.4 trillion by the end of this year that has gone into big infrastructure projects, up from 6.1 trillion in 2015. Last August the central government set a cap on total local government debt at 16 trillion yuan last year.
Rising indebtedness among local governments has given rise to concerns both in China and globally of risk to financial stability, and has sparked measures including the loans-for-bonds swap programme.
“Local governments now understand the importance of local government debt to their local economies. In terms of the management of their pricing, working with banks, they have released a series of supportive policies. We will work with them in a positive manner,” said Wu Wei, Bocom’s chief financial officer.
Speaking at the company’s results briefing on Tuesday, he added that Bocom would aim to buying 7 per cent of all issuance this year, adding to the 280 billion yuan of local government debt it bought last year. That figure made up most of the bank’s new 320 billion yuan of bond investments in 2015, a total that was in turn 40 per cent above that of 2014.
The swap programme has not been without its problems. The finance ministry revised its local government debt target issuance figure three times in 2015, drawing financial industry complaints that the rush of issuance flooding the bond market would suck up liquidity. Ministry officials visiting Hong Kong last year said the programme was not market-based, and the ministry has yet to disclose a target figure for the bond issuance that will go to swapping loans for this year.
Banks reporting in Hong Kong this earnings season commonly report they are investing in a lot more local government bonds than the loan swaps they receive -- resulting in a gross increase in their exposure to local government in the programme originally conceived to restructure local government finance.
“The local governments use the bond proceeds received to repay the trusts first. They are actually paying very little back to banks,” said a bank analyst declining to be named.
Sophie Jiang, head of China bank research at Nomura, also noted that there were cases of a time lag between bond purchases and loan repayments, which could indicate that some local governments are holding on to the extra money rather than taking a straight swap.
Bocom’s Wu said there had been an impact on the bank from the programme because there was a mismatch between the amount of loans given out and the amount of bonds swapped, although he also noted the benefits of the programme.
“Corporate bond pricing is exceptionally low – they are close to banks’ own funding costs. It is very unreasonable,” he said.
“With local government bonds, one, it is a major state policy; two, the risk weightings are low. They only make up 20 per cent of risk weighting. At the same time, after tax considerations, their returns are higher than corporate bonds, and we can pledge them with the central bank as collateral,” he added.
Other analysts said the low capital weighting of local government bonds meant the swaps would not necessarily be a burden.
“Swapping loans into bonds will give banks four times more room to subscribe to local government-related credit assets, assuming same capital consumption,” said Nicole Wu, China financials analyst at DBS.