Chinese retail investors rush into municipal bonds

When the major port and industrial hub of Ningbo sold China's first municipal bonds to retail investors, an amount of 43 million U.S. dollars was snapped up in just five hours.

One buyer was Mrs Yan, an accountant from the city in the eastern province of Zhejiang, who bought 100,000 yuan (14,900 U.S. dollars) 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 U.S. dollars) 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.

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 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.

Underwritten by Beijing

Lu Ming, an 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.

The municipal bonds not only attracted retail investors, institutional buyers have also snapped up local government bonds. "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, a 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.

(CGTN)