The SSE pushes issuance of local government general bonds to a new level.
On August 22, the 20-year Inner Mongolia Autonomous Region general bond was successfully issued by tender on the Shanghai Stock Exchange (SSE). The bond was China’s first local government general bond with an extra-long term, as well as the first local government bond with the insurance institutions subscribing for over 90% of the total amount.
According to the sources, the issuance size of the bond was RMB10 billion, with the issuing rate at 4.44%, which was 12.6%, or about 50 basis points higher than the treasury bond benchmark. The market acceptance was high, with the subscription ratio at 3.09 times. In the subscription, the total bid of the securities companies amounted to RMB18.93 billion, which was 1.89 times of the issuance size, with RMB5.05 billion winning the bid, accounting for 50.5% of the issuance size, which hit a record high for the underwriting of a single bond by the underwriting syndicate of securities companies. It is worth pointing out that insurance institutions subscribed for more than 90% of the total amount of the bond. According to the "Opinions on Making Effective Efforts in Issuance of Local Government Bonds in 2018” (Cai Ku  No. 61 Document), the Finance Department of the Inner Mongolia Autonomous Region issued RMB2 billion of 1-year general bond and RMB8 billion of 2-year general bond simultaneously this time. Thus, within the scope of the term allowed by the Ministry of Finance, the issuance has enriched the terms of the Inner Mongolia bonds and laid a solid foundation for forming a local government bond yield curve with a complete structure of terms, which will make the issuing rates of the local government bonds more market-oriented.
The completion of the issuance of the 20-year general bond marks another successful practice of the SSE’s giving full play to the advantage of abundant resources of investors and vigorously supporting the innovation in the local government bonds. In order to advance the smooth launch of the product, the SSE conducted plenty of market research in the early stage, learning that the insurance funds have stable demand for the interest rate bond products with long durations and low risks, and assisted issuers in organizing market promotion. According to the market research, currently about 35% of the insurance funds are invested in bonds, with a scale of more than RMB5 trillion, and are in favor of the bond products with long terms, high security, low risks and stable yields. With relevant characteristics and advantages, the extra-long local government general bonds can fully meet the demand of the insurance funds for the extra-long-term allocation. The launch of the product is expected to attract the insurance institutions to the continuous participation in investment in local government bonds, introduce large and stable sources of non-bank funds into local government bonds, help further improve the structure of the investors in the local government bonds, and boost the healthy development of the market. Therefore, the successful issuance of the extra-long-term local government general bond marks the beginning of a new stage in the issuance of local government bonds.
Since the beginning of this year, the SSE has implemented the relevant work arrangements of the China Securities Regulatory Commission and the Ministry of Finance of the P.R.C., energetically promoted the development of the local government bond market, and become the largest market for public offering, with this year’s total issuance exceeding RMB1.1 trillion, accounting for 47% of the total amount of the public offering in all markets. Recently, the Ministry of Finance has introduced the open underwriting, flexible tendering and other institutional arrangements to further improve the top-level design of the local government bonds, which have seen the development accelerated again. Going forward, the SSE will continue to provide effective support for relevant departments to accelerate the issuance of local government bonds in an orderly way, and give full play to the role of the local government bonds in stabilizing investment, expanding domestic demand and mending loopholes, so as to win the tough battle of preventing and defusing major risks.