China's local governments and other related agencies decided the best way to deal with a sluggish economy is to sell debt earlier to raise cash -- and give the economy a badly-needed shot in the arm.
Authorities in the provinces of Sichuan and Henan will be offering a combined 87.6 billion yuan ($12.6 billion) of so-called "special bonds" at the earliest such issue on Thursday since national sales started in 2015. Sales started in the first quarter last year after the annual budget was officially approved by the legislature.
Yet the Chinese government has directed local governments to push the timetable forward for a second year to increase investment in areas such as transportation and energy infrastructure.
The change comes as policymakers try to control the pace of a long-term downturn, while China's economy shows signs of stability at a period when an initial trade agreement with the U.S. was reached.
Analysts predict that creditors seeking lower-risk alternatives to corporate bonds, which see increasing defaults, would receive the debt well.
The widely anticipated liquidity injections from the central bank should also help and cut the number of cash lenders needed to hold as reserves, releasing some 800 billion yuan of funds starting the first week this month.
The demand is seen to be higher as local government bond output is higher compared to central-government bonds but of the same sovereign ratings, said Xing Zhaopeng, the market economist at Australia & New Zealand Banking Group Ltd.
Banks will prefer local government bonds for both security and return, Xing said. The gap between ten-year municipal and sovereign bond yields has narrowed to 20 basis points, suggesting local government bond yields for both security and return, he added.
In November, the Ministry of Finance allocated a 1 trillion-yuan special bond pool so that earnings can be put to work. Eventually, the overall quota for 2020 could exceed 3 trillion yuan, said Becky Liu, the Chinese macro strategy's head of Standard Chartered Bank (HK) Ltd.
With an estimated 2 trillion yuan in general bonds expected to be rolled over, the overall supply of local-government bills could top some 4.4 trillion yuan in 2019, which has been the highest since 2016.
According to Liu, they anticipate more local governments to roll out bond-issuance programs at the beginning of January that will lead to a strong start this year.
Eleven provinces and cities have already announced plans to sell over 450 billion yuan in the first quarter together with special bond plans.
Zhong Linnan, a fixed income analyst at Yuekai Securities Co., estimates that 1.7 trillion yuan to 2 trillion yuan of bonds will be sold through March totaling 1.4 trillion.
