Henan kicks off first bond sale under China's debt-swap plan
Adds auction results in paragraph 3 and comments in paragraphs 11-13
SHANGHAI/SINGAPORE, Nov 15 (Reuters) -China's Henan province sold 31.8 billion yuan ($4.4 billion) in refinancing bonds on Friday, the first such sale since Beijing's announcement of a local government debt-swap plan.
China unveiled the 10-trillion yuan ($1.38 trillion) debt package last week with the aim of addressing municipal debts, which have grown harder to bear while revenue from land sales dried up during the property downturn.
Henan's refinancing bonds were sold with a 10-year term and a coupon rate of 2.26%, traders said. The proceeds will be used to "swap existing hidden debt", according to official documents released earlier in the week.
On Thursday, Guizhou province and the city of Dalian also announced similar fundraising plans as a new round of debt swaps begins in earnest. Guizhou and Dalian plan to raise 47.6 billion yuan and 10.4 billion yuan, respectively, to repay hidden debt.
Local governments' implicit debt, or hidden debt, includes loans, bonds, and shadow credits of local government financing vehicles, or LGFVs.
The debt swap will alleviate interest burdens on local governments, freeing up capital to focus on regional economic development.
"Requiring local governments to allocate a quarter of their budget revenue to debt resolution is quite challenging," said Davis Sun, senior director of international public finance for Asia Pacific at Fitch. However, with the debt swap plan, this ratio can drop to around 4%, he said.
Beijing disclosed that local government's hidden debts were 14.3 trillion yuan at the end of 2023, with plans to reduce this to 2.3 trillion yuan by 2028. The International Monetary Fund estimates LGFV debts at 60 trillion yuan.
The gap remains a problem as most LGFVs do not generate sufficient cash from their operations to repay the debts.
"I believe this is the core risk of local government debt, as this portion of the debt may continue to rely on local fiscal support in the future," Fitch's Sun said.
Market participants are closely watching for further debt issuance announcements from other local governments to assess bond supplies for the rest of the year and determine which regions will benefit most from the debt resolution package.
Analysts at Cypress Investment Management said that this year's refinancing bond quotas might favour economically strong provinces such as Jiangsu and Zhejiang, in contrast to last year's focus on economically weaker regions.
They prefer short-dated bonds with maturities under three years, given the 2028 debt swap cut-off and higher interest rate risks for long-term bonds.
($1 = 7.2428 Chinese yuan renminbi)
Reporting by Li Gu in Shanghai, Tom Westbrook in Singapore, and Ma Rong in Beijing
Editing by Shri Navaratnam
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