China’s Bond Market Faces Demand Test as Refinancing Surge Looms

A test of demand for Chinese local government debt will come this week as authorities are set to sell the most bonds in more than five months, mainly for refinancing.

Nearly 193 billion yuan ($30 billion) of local Chinese bonds are scheduled to be issued, the highest amount since Sept. 25, according to data compiled by Bloomberg. Almost all will used for refinancing existing debt, except a 11.4 billion yuan bond sold by the province of Sichuan to provide capital for small local banks.

The sales come after authorities announced a larger-than-expected 3.65 trillion yuan quota for special local government bonds last week, which analysts said will renew supply pressure. The nation’s benchmark bond yields have risen almost 80 basis points since the lows of last April, as the country embarked on a debt-fueled spending spree to combat the pandemic and the central bank took steps toward normalizing monetary policy.

“Authorities are likely using up remaining quota from the previous year,” according to Zhou Yue, a bond analyst at Zhongtai Securities. With the new quota, “local government bond supply is expected to accelerate between April and June and the central bank may have to step in with liquidity injections,” he said, adding that total government bonds sold in April could even surge to 1 trillion yuan.

China’s Bond Market Faces Demand Test as Refinancing Surge Looms

Policymakers have hinted that monetary and fiscal stimulus will be more restrained compared with 2020, meaning much-needed cash injections to help commercial banks and domestic investors -- the main buyers of local government debt -- to digest upcoming supply could be limited.

The People’s Bank of China tightened liquidity in the financial system and drove up rates in the money market in January, in a move that shocked markets and suggested that an era of cheap and plentiful funds has ended.

While Chinese authorities are signaling there’s still a need for spending to support the economy, a conservative economic growth target announced at the nation’s biggest political meeting of the year suggests focus is shifting away from the pandemic recovery and toward longer-term challenges like reining in debt.

©2021 Bloomberg L.P.

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