China's promise of a 'comprehensive' package to address local debt issues has triggered a rush into bonds issued by local government financing vehicles (LGFV) as investors sense an implicit state guarantee for these provincial firms.
Pedestrians wait to cross a road at a junction near a giant display of stock indexes in Shanghai, China August 3, 2022. REUTERS/Aly Song/SHANGHAI/SINGAPORE, Aug 17 - China's promise of a "comprehensive" package to address local debt issues has triggered a rush into bonds issued by local government financing vehicles as investors sense an implicit state guarantee for these provincial firms.
The narrowing of spreads is more pronounced in lower grade LGFV bonds, despite growing signs of fiscal stress for local governments, whose primary source of income is from infrastructure and land sales, both of which are sputtering. In the meantime, as the economic recovery falters and property sector problems ensnare more developers such as Country Garden Holdings
The demand has also meant LGFVs accounted for 63.9% of the non-financial credit products in the top 10 holdings of wealth managers as of the second quarter, up 3.7 points from the first quarter, analysts at China International Capital Corp said in a report. Even in Tianjin, one of the most heavily-indebted cities in China, commercial paper issued by the Tianjin Infrastructure Investment Group rated AAA by China Lianhe Credit Rating was oversubscribed 43.4 times, pushing the borrowing cost down to 4.5%. A previous issue earlier in August was at 6.16%.
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