Heart over head, Chinese retail investors rush into municipal bonds

SINGAPORE/SHANGHAI (Reuters) - When the major port and industrial hub of Ningbo sold China’s first municipal bonds to retail investors, an amount of $43 million was snapped up in just five hours.

Customers use smart machines inside a branch of Industrial and Commercial Bank of China (ICBC) in Beijing, China April 1, 2019. REUTERS/Florence Lo

One buyer was Mrs Yan, an accountant from the city in the eastern province of Zhejiang, who bought 100,000 yuan ($14,900) of the bonds, impressed by a call from a local bank to “love Ningbo forever by holding Ningbo bonds”. She believes the money will be used to improve lives and the local government will not defraud her, she said.

China piloted the first batch of local government bonds targeting retail investors in recent weeks at bank outlets in six regions including Beijing and Ningbo, raising a billion dollars.

The bonds sold like hot cakes, illustrating a potentially lucrative outlet for local governments who analysts estimate have been given permission by the central government to raise between 4.5 trillion yuan to five trillion yuan ($672 billion to$746 billion) via bond sales this year alone.

While it is not clear how many of the bonds will be sold to retail investors, the debt is not without risk.

Local governments and their financing vehicles already have a mountain of debt and analysts question if many municipal authorities can generate the revenues to meet their debt obligations, especially as the central government has flagged tightening budget pressures.

Chinese credit rating agencies also give the local government bonds top-notch AAA ratings, providing no distinction for investors between the issuers and their ability to service and ultimately pay off the debt.

Still, many retail investors believe the bonds are effectively guaranteed by the central government, which has called on local authorities to finance new infrastructure projects to support an economy growing at its slowest pace in three decades.

Local governments and central governments are seen as inseparable apparatus in the Communist Party-controlled political system, even though Beijing wants regional municipalities to be accountable for their borrowings.

Local governments have more than 50 trillion yuan in debt outstanding, including through the use of off balance-sheet financing vehicles, according to Goldman Sachs, and they have been the country’s fastest-growing borrowers of recent years.

For a graphic on Shifting debt structure, see -

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Lu Ming, economics professor at Antai College of Economics & Management in Shanghai, said many local governments are making capital of the implicit guarantee of debt by the central government. “Without such a backing, no one would lend you money.”

Indeed, Mrs. Yan, who declined to provide her given name, said she didn’t read the bond prospectus when she bought five-year Ningbo municipal bonds yielding 3.32 percent a year to maturity.

In Beijing, 65-year-old retired teacher Guo Xiulan, who pulled 50,000 yuan out of wealth management products yielding 5 percent to buy local government bonds yielding 3.25 percent, said she did not understand credit ratings and had not looked into the city’s fiscal health.

“I was born in Beijing; I live in Beijing. I feel Beijing’s construction needs the support of the ordinary people,” said Guo, who says she doesn’t understand credit ratings. The prospectus said the bond would fund shantytown redevelopment and land purchases.

Still, their expectations may not be misplaced if institutional buyers, who have also snapped up local government bonds, are anything to go by.

“At the moment, you don’t even see defaults by bonds issued by local government financing vehicles,” said Wang Ming, a manager at the trading department of Hua Chuang Securities in Shanghai. “I cannot imagine the central government would tolerate defaults in municipal bonds.”

Amanda Du, senior analyst at Moody’s Investors Service, reckons that borrowing from retail investors could potentially make local governments more accountable. Residents are generally more familiar than investors from elsewhere with local projects since they sit on their doorstep.”An individual investor in a bond that finances a shanty town redevelopment project could be living just several blocks away. This kind of supervision can pressure the government to improve governance as well as information disclosure on that project,” Du said.


Investment bank CICC said investors should take a closer look at an issuer’s ability to pay off debt. The bank estimates the 23 most-indebted Chinese provinces have total debt exceeding 300 percent of their annual revenues.

Indeed, China’s finance minister, Liu Kun, warned local governments last month they would be subject to more budget pressure as the economy slows down and Beijing pushes through with tax cuts. He noted at a press conference that some regions were having difficulty paying salaries and maintaining operations and social security.

In some ways, the Chinese debt landscape is like the European Union, said economics professor Lu. Both have economic imbalances and the risk is that bailouts of weak borrowers will encourage them to simply borrow more.

“Developed countries in the EU are worried that if they help pay off debts for less developed nations such as Greece, there would be moral hazards. Greece would continue to borrow ... Economically speaking, the situation is similar in China.”

Reporting by Shu Zhang and Sam Shen; Editing by Vidya Ranganathan and Neil Fullick