China Bans Domestic Investors from Buying Offshore Yuan Bonds
China has effectively banned domestic investors from buying offshore yuan bonds issued by local government financing vehicles (LGFVs) through its trading link with Hong Kong, according to people familiar with the matter.
The People’s Bank of China has asked brokerages and banks to suspend purchases of LGFVs’ so-called dim sum bonds via the Bond Connect, a program that links the mainland and Hong Kong debt markets. The people, who asked not to be named discussing a private matter, did not offer further details or say when such buying may resume.
Background
While details of the PBOC’s motivation are unclear, the move follows recent policy efforts to curb risks from LGFVs that borrowed heavily during China’s previous infrastructure booms and are now considered a potential threat to financial stability. It also comes after Beijing gave local governments a 10 trillion yuan (S$1.8 trillion) lifeline earlier this month to swap hidden debt that is mostly owed by LGFVs.
Local Authorities Struggle
Local authorities have been struggling to service their liabilities as an unprecedented property crisis wiped out land sales they relied on for revenue. Officials said earlier this month that the outstanding value of hidden local debt was 14.3 trillion yuan as of the end of 2023, far short of the International Monetary Fund’s estimate of about 60 trillion yuan.
Impact on Bond Market
The Bond Connect, which also grants global investors access to China’s vast onshore debt market, has been a popular channel for mainland investors to purchase dim sum bonds, including those issued by LGFVs. Sales of corporate dim sum bonds, excluding certificates of deposit, have jumped to 392 billion yuan this year, the highest since Bloomberg started compiling such data since 2007. LGFVs account for about 40 per cent of the total issuance this year.
Uncertainty
It’s unclear whether onshore investors can still purchase LGFVs’ dim sum notes via other channels such as the Qualified Domestic Institutional Investors scheme. The average coupon of LGFV dim sum bonds issued this year is around 5.8 per cent, more than 300 basis points above that of their notes sold onshore, according to Bloomberg-compiled data.
Conclusion
China’s move to ban domestic investors from buying offshore yuan bonds issued by LGFVs is a significant step to contain risks from the debt-laden sector. The decision is expected to have a significant impact on the bond market, particularly for LGFVs that rely heavily on bond issuance to finance their operations.
FAQs
Q: Why has China banned domestic investors from buying offshore yuan bonds issued by LGFVs?
A: The move is part of China’s efforts to curb risks from LGFVs that borrowed heavily during China’s previous infrastructure booms and are now considered a potential threat to financial stability.
Q: What is the Bond Connect and how does it affect LGFVs?
A: The Bond Connect is a program that links the mainland and Hong Kong debt markets, allowing mainland investors to purchase dim sum bonds issued by LGFVs. The ban on domestic investors buying offshore yuan bonds issued by LGFVs via the Bond Connect is expected to have a significant impact on the bond market.
Q: What is the motivation behind China’s decision?
A: The motivation behind China’s decision is unclear, but it is expected to be part of a broader effort to contain risks from the debt-laden sector.
Q: Can onshore investors still purchase LGFVs’ dim sum notes via other channels?
A: It’s unclear whether onshore investors can still purchase LGFVs’ dim sum notes via other channels such as the Qualified Domestic Institutional Investors scheme.
