Local government bonds slump amid ‘hidden debt’ concern

Investors are worried that issuers are over-leveraged and at risk of being unable to repay bond obligations

Local government bonds slump amid ‘hidden debt’ report

(ATF) Chinese local government bonds fell the most in two weeks on concern the authorities that issue them are more indebted than thought.

The governments of cities, provinces and counties carried almost 15 trillion yuan ($2.3 trillion) in hidden debt last year, according to Bloomberg. Investors fear such a debtload will make it harder for the issuers to repay their future borrowing obligations.

The returns-focused ATF China Bond 50 Index of AAA rated Chinese credits was unchanged at 106.33 on Thursday. That hid a 0.10% decline on the Local Governments sub-index. 

Also on ATF

The measure is the best-performing of ATF’s Chinese bond indexes, having climbed to 107.60. It’s lost 0.21% since March 10 when the financial and economic affairs committee of the National People’s Congress (NPC) warned legislators that debt was weighing down local government issuers and that bond sales must be reduced.

Chinese authorities, on the orders of the People’s Bank of China central bank, issued a record amount of bonds last year to help rebuild local economies ravaged by the coronavirus pandemic downturn.

That also helped send the bonds of state-owned enterprises lower, with the ATF sub-index dropping 0.38%. SOEs are are the companies most likely to win contracts to carry out works for which the local government funds were raised.

The hidden debt is separate to that accrued from bond sales and which are recorded in authorities’ balance sheets, the Bloomberg report said.

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