Market forces appeared to have had little impact on the pricing of the first batch of municipal bonds independently sold by the Guangdong provincial government, the Hong Kong Economic Journal reported Tuesday, citing analysts.
The province on Monday auctioned a combined 14.8 billion yuan (US$2.38 billion) worth of local government bonds. The debentures were sold in three tranches with tenors ranging from five to 10 years.
The winning bids offered interest rates at 3.84 percent for the five-year tranche, 3.97 percent for seven years, and 4.05 percent for 10 years, surprisingly lower than the coupons for national bonds of the same maturities. Normally, the interest rates for local government bonds issued by the Ministry of Finance are set at least at 10 basis points above those for national bonds of the same maturities.
Analysts said that indicates that non-market forces, rather than market benchmarks such as credit risk ratings, are still dominant in bond issuance in the mainland, as bonds issued by local governments are generally considered as having higher credit risks amid relatively low liquidity compared with national bonds.
In a move to increase transparency of lending to local governments, central authorities have unveiled a scheme allowing 10 municipalities to issue bonds on their own to raise a combined 109.2 billion yuan.
Aside from Guangdong, the other local governments participating in the program are Shanghai, Zhejiang, Shenzhen, Jiangsu, Shandong, Beijing, Qingdao, Ningxia and Jiangxi. Before the new arrangement, they all had to sell debt through the Ministry of Finance.
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