Shenzhen floats idea of selling bonds directly in Hong Kong and Macau in China first

Shenzhen’s finance bureau has floated the idea of selling local government bonds in Hong Kong and Macau
If the plan goes ahead, the city will be the first local government to sell bonds directly beyond mainland borders

Macau

Sidney Leng

Published: 6:00pm, 10 Jan, 2020

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Shenzhen is exploring the possibility of issuing offshore government bonds in Hong Kong and Macau to tap into foreign investors and boost the local economy, according to an official report.

The plan was proposed by Shenzhen’s finance bureau at the annual local legislature meeting this week, partly to increase connections between financial markets in the two cities, said a report from the official Shenzhen Special Zone Daily.

If the plan goes ahead, it would be the first direct offshore bond issuance by a local government in China.

The announcement came as the city reported economic growth of 7 per cent last year – in line with its target – showing a surprising rebound in the last quarter after growth slowed to 6.6 per cent over the first nine months of the year.

In the past, provincial and lower level governments have relied on local government financing vehicles (LGFVs), which are state-backed, to function as proxies for them to raise funds by issuing offshore bonds. In June last year, to contain financial risk, the central government restricted LGFVs from issuing offshore bonds and ordered local governments not to guarantee the loans.

Shenzhen’s finance bureau added that the city’s debt level was low compared to others in China, indicating a better credit profile to woo investors.

On January 9, Shenzhen’s outstanding local government debt from bonds stood at 67.8 billion yuan (US$9 billion), the lowest among four first-tier cities including Beijing, Shanghai, and Guangzhou, according to financial terminal Wind.

The city is among the least vulnerable to debt risks in China, with much stronger fiscal revenues and new credit flows than many other cities, according to an analysis of financial stress among 208 Chinese cities from Rhodium Group, a New York-based consultancy.

Last year, Shenzhen’s fiscal revenue rose 3.5 per cent to 942.4 billion yuan (US$135.5 billion) from a year earlier, based on official data. By comparison, Beijing’s revenue grew by only 0.5 per cent to 581.7 billion yuan (US$83.6 billion) and Shanghai’s by 0.8 per cent, to 716.5 billion yuan (US$103 billion). In the first 11 months of 2019, Guangzhou’s revenue increased by 3.2 per cent to 153.4 billion yuan (US$22 billion).

Bond issuance has become a major source of financing for local governments to fund infrastructure projects amid an economic slowdown. Last year, local governments raised a total of 4.3 trillion yuan (US$618 billion) from bonds, up nearly 5 per cent from a year earlier, according to data from the Ministry of Finance.

“Compared to offshore bonds issued by LGFVs, an offshore bond issued by a local government will at least improve some transparency on the city’s financial health as the government needs to open up their books for investors,” said Terry Gao, an analyst from Fitch Ratings.

While Beijing is opening up its onshore bond market to foreign investors, local government bonds have been a hard sell.

The percentage of foreign investors snapping up local government bonds has remained relatively low, according to Hayden Briscoe, head of fixed income for Asia-Pacific at UBS Asset Management.

“We love the credit [of local government bonds],” said Briscoe. “Unfortunately there is no secondary market liquidity in a lot of the local government bond market. Our funds are open-ended funds, we can buy as many local government [bonds] as we want but we find it difficult to sell. So we are staying away from local government [bonds] until their secondary liquidity improves.”

Other foreign investors are not putting their money into local government bonds just yet because they are not familiar with the credit profiles, Briscoe said.

“When they make the allocation, it typically goes to [central] government bonds and policy bank bonds.”

Additional reporting by Amanda Lee

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This article appeared in the South China Morning Post print edition as: Shenzhen considers offshore bond issue

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