Jiangsu and Anhui provinces did not attract sufficient buyer interest last month for their bond offerings. As a result, Beijing’s heralded debt-for-bond swap program failed to launch.
The unexpected withdrawals suggest central government technocrats are running out of options to rescue the faltering economy.
On April 16, Jiangsu announced a plan to offer 64.8 billion yuan ($10.5 billion) of bonds with maturities of three, five, seven, and ten years. The five- and seven-year debt was slated to make up more than half the total.
As the South China Morning Post notes, it is not clear whether the Jiangsu offering was part of the trillion-yuan swap program, as widely reported, or an allocation of the 600 billion yuan quota for regional and local government debt contained in the national budget for this year. In any event, Jiangsu’s bonds would have been the first issued since the Finance Ministry announced the debt swap on March 8 and were therefore a crucial test of sentiment.
The central government, with its swap program, sought to help provinces and lower-tier governments by turning bank debt into bonds, thereby lowering interest payments and lengthening maturities. Many of the existing obligations had been incurred by LGFVs, the notorious local government financing vehicles, in arrangements intended to avoid Beijing’s now-modified prohibition on debt issuance.
Despite the strict rule against borrowing, local governments had managed to incur, by June 30, 2013, 17.9 trillion yuan of debt according to the National Audit Office. The actual sum was probably in excess of that, and the amount has undoubtedly increased since then as municipal and city tax collections and other revenue have recently plummeted.
The land-sale revenue of Nanjing, Jiangsu’s capital, fell 39% in 2014, for instance. This revenue, which until recently was the primary source of cash for many local governments, will almost certainly drop this year. Land sales declined 32% in the just-completed quarter for the country as a whole. In the second week of April, revenue from such sales fell 57% in 40 Chinese cities.
No wonder the underwriting team for the Jiangsu deal, led by seven banks, had problems marketing the paper. Apparently, banks, the primary takers of bonds in China, thought the offered interest was too low.
Source : forbes.com/sites/gordonchang/2015/05/03/in-chinas-bond-market-something-worse-than-a-default/