China driving rise in local government bond issues, says Fitch

28 Apr 16

Local governments’ recourse to capital markets is on the rise, fuelled by growing issuances in China, Fitch Ratings has found.

The analysts said Chinese sub-national governments were the biggest local authority bond issuers in 2015, placing bonds worth almost $600bn on the markets.

Altogether, local authorities in the 12 biggest countries held debt liabilities of $10tn last year, or 20% of gross domestic product.

Fitch expects annual issuance of local governments in major countries to approach $1300bn in 2016 and thereafter, more than double the $500bn seen in 2011.

It said this will be driven by the continuing pace of issuances in China through 2016-18, supported by national government-sponsored initiatives to refinance around $2500bn worth of loans with cheaper, longer-term bonds.

As decades of poor management saw China’s local government debt soar to 38% of GDP, the country has stepped up local government financing reforms in hopes of bringing the figure down.

In February, Beijing also opened up the country’s government bond market to foreign investors in a bid to draw in funds despite the economy slowing to its lowest growth rate in a quarter of a century.

Other big local government issuers include the US, where local authorities’ bond placements have hovered at around $400bn since 2005, Germany with $60bn, Japan and Canada each with $50bn and Australia with $40bn.

Fitch said the market outside the US is gaining depth, with the number of issuers edging towards 500 and nearly 2,000 transactions last year, compared to 15,000 in the US.

The inclusion of subnational bonds by the European Central Bank as part of an asset purchase programme may even spur issuance in western Europe, Fitch said.

The region had seen a fall in bond borrowing amid austerity and economic slowdown. Credit Ratings Agency Standards & Poor also said earlier this year that the fall in local and regional government borrowing across Europe was likely to end this year.

Fitch said low rates and potentially tighter bank lending due to tougher capital requirements were among the factors that could induce further issuance from sub-national governments.


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