context: The Ministry of Finance announced its C¥10 bn debt management plan on 8 November 2024, focused on managing hidden debt and stabilising economic growth. This marks over one year of this new round debt relief that commenced in October 2023, in which special refinancing bonds and special purpose bonds were the major tools at play. Special refinancing bonds, first issued December 2020, were employed as a targeted tool to resolve debt in the most high-risk areas. This influx of new bonds could be the antidote that institutional and retail investors have been craving.
Five provinces and municipalities have issued a total of C¥224 bn special refinancing bonds following the Ministry of Finance’s C¥10 bn debt relief plan to swap out hidden debt, reports ChinaBond, as at 18 November 2024
- Henan: C¥31.8 bn ten-year maturity issue
- Guizhou: C¥58.3 bn issue, C¥47.6 bn to resolve hidden debt
- Dalian: C¥11.2 bn issue, C¥10.4 bn to resolve hidden debt
- Jiangsu: C¥120 bn 15-, 20- and 30-year maturity issue
- Qingdao: C¥14.2 bn ten-year maturity issue
Markets are paying close attention to potential supply shocks arising from the influx of new special refinancing bonds. The real supply-side pressures will be concentrated around late November to early December, since current issues have not reached what is considered 'large scale issuance', reveals an unnamed analyst to Jiemian.
This time, there is a relative even spread of bond issues with a ten-, 15- or 30-year time to maturity, which have longer maturities than issues in October 2023, highlights Xiao Jinchuan 肖金川 Huaxi Securities analyst. In addition, this new round of bond issues poses two main funding challenges
- taxation reduces funding availability
- however, upwards pressure on funding rates is manageable as November is not a big tax-paying month
- subsequent larger scale special refinancing bond issues place pressure on bank liquidity expectations
Since most special refinancing bonds are absorbed by banks, bank reserves are depleted, tightening money market liquidity. Yet, market shocks from special refinancing bond issues, primarily used for debt swaps, are limited, argues Li Yong 李勇 Soochow Securities analyst. Bond issues impact the market, but are not a deciding factor. Li maintains that the bond market is still stable and that a market downturn has not yet materialised because
- the central bank can cut rates to hedge rising yield rate risk
- the bank announced another upcoming rate cut between November to December to ease bank funding pressure
- drawing on 2023 data, government bond yields did not rise in October and November, but instead fell in December following mortgage rate cuts
C¥1.2 tn special refinancing bonds will be issued in the last six weeks of 2024, forecasts Li.