Where did 555.9 billion yuan of local debt go in July?

The issuance of local government bonds (hereinafter referred to as local bonds) is the only legal channel for local financing. In July, about 555.9 billion yuan of government bonds were issued by 27 provinces (regions and municipalities) in China. Where did the money go?
According to the local bond market report of the Special Office of Government Debt Research and Assessment of the Ministry of Finance, in July local governments issued about 376.5 billion yuan of new bonds, 158.4 billion yuan of refinanced bonds and 21 billion yuan of replacement bonds.
Local refinancing bonds mainly borrow new bonds to repay old ones, while replacement bonds issue government bonds to replace non-bond debt. Both of them are essentially borrowing new ones to repay old ones, and do not add new investment. Therefore, the focus of the market is on where new bonds are spent by local governments.
According to the above report, in July, 30% of the new bond funds (112 billion yuan) were used for affordable housing and shantytown renovation and about 20% for land reserve, which accounted for half of the new bonds. In addition, it invested about 57.8 billion yuan in municipal construction, 46 billion yuan in transportation, 45 billion yuan in poverty alleviation, poverty alleviation, agriculture, forestry and water, 19 billion yuan in education, health, social security, and 12.4 billion yuan in ecological construction and environmental protection.
In the past few months, the investment of local government bond funds is basically in the above-mentioned areas. Although the proportion has changed, the funds used for affordable housing, shantytown reconstruction and land reserve account for half.
In order to give full play to the role of bond funds in making up for the shortcomings of stable growth, this year’s local bond issuance progress was unprecedented until January. The Ministry of Finance asked the local government to complete the task of issuing 3.05 trillion yuan of new bonds by the end of September. At present, the progress of issuing bonds has reached 83.59%.
According to the report, as of July, 14 of the 36 places with creditor’s rights (i.e., provinces, autonomous regions, municipalities directly under the Central Government and cities with separate plans) had completed the task of issuing debt, namely Xiamen, Beijing, Liaoning, Dalian, Shanghai, Zhejiang, Ningbo, Fujian, Jiangxi, Guangdong, Shenzhen, Guangxi, Sichuan and Xinjiang.
Guizhou, Qinghai, Inner Mongolia and Ningxia account for more than 90% of the debt issuance progress. At present, the slowest progress (15.6%) in issuing debt is in Tibet. However, many local debt experts on the first financial reporter analysis, according to the current progress of local government bond issuance, by the end of September can basically complete the task of issuing new bonds.
In the first seven months of this year, local governments have issued about 3.4 trillion yuan of local government bonds, of which five provinces, Jiangsu, Zhejiang, Guangdong, Shandong and Sichuan, have issued more than 200 billion yuan of local government bonds.
Local government bonds are still popular in the market, as can be seen from the index of subscription multiples. Local government bond issuance averaged 15.64 times in July, and the subscription multiples of local government bonds have remained above 10 since this year. In January this year, the subscription multiples of Hebei, Henan, Shandong and other places reached 450. This is related to the fact that the interest rate of local government bonds has risen by at least 40 basis points compared with that of national debt.
However, as the tender interest rate of local government bonds issued by the Ministry of Finance at the beginning of the year rose by at least 25-40 BP compared with the average value of the first five days of the same maturity bonds (spreads), the subscription multiples of local government bonds decreased.
In July this year, the spread of local government bond issuance ranged from 21 BP to 41 BP, with an average spread of 26 BP. Ring-to-Ring spread narrowed, the lower limit increased by 1 BP, the upper limit decreased by 9 BP, and the mean spread decreased by 1 BP.
Interest rates on local government bond issuance have fallen since May.
The average issuance rate of local government bonds in July was 3.46%, slightly lower than the previous month. From January to July 2019, the average interest rate of local government bonds issuance was 3.47%.