Urban Bond Guarantees Under Scrutiny
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As we delve into the dynamics of China's municipal bond market in 2024, a stark contrast becomes evidentOn one hand, the market grapples with persistent risks associated with non-standard municipal debts, while on the other, a robust surge in demand for standardized municipal bonds is witnessed, driven by a novel set of debt reduction policies that have catalyzed unprecedented levels of subscription and a constant drop in issuance rates.
Recent data from Zhongzheng Pengyuan shows that by the end of October 2024, the market had recorded a staggering 66 instances of non-standard debt risks.
Reflecting on the initial signs of trouble, one remembers the first-ever default of a non-standard municipal debt in January 2018, when China Rongzhi International Trust announced that a state-owned enterprise in Yunnan Province failed to repay its trust loan's principal and interest
This event marked a watershed moment, as it shattered faith in the rigid repayment belief of municipal financing platforms, leading to sporadic defaults in various provinces across China.
In response to rising default risks, the Political Bureau of the Central Committee laid out a plan in April 2024 to effectively address local government debt issues, focusing on regions with high debt risks to ensure that reductions in debt do not stymie developmental efforts.
Consequently, the risks associated with municipal debt payments are perceived to have been alleviated, with high-quality municipal bonds receiving enthusiastic attention from institutional investors.
In the early days of December 2024, amidst a backdrop of enthusiastic institutional buying and a scarcity of quality assets, high-grade municipal bonds traded vigorously in the secondary market, with yields plummeting
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Notably, some AAA-rated municipal bonds saw their issuance rates drop below 2%.
As of now, there have been no defaults in the municipal bond sector, and the prevailing belief in municipal debt continues to hold sway within the market
Will this "faith in municipal bonds" endure into 2025? The general consensus leans towards a positive affirmation.
Looking ahead to 2025, CITIC Securities anticipates that under the principal narrative of debt replacement, the risks within the municipal bond market will remain manageableHowever, the supply of industrial debt is unlikely to reverse the prevailing asset scarcity pattern in the credit market, indicating that municipal bonds will continue to represent a core asset for credit allocationsThe ongoing decline in benchmark interest rates suggests that finding residual yield premiums in municipal bonds will emerge as a crucial competitive focal point.
Additionally, CITIC Securities notes that the current configuration dynamics of the municipal market are centered around the mid-2027 timeframe, where investors exhibit differing views regarding the cost-effectiveness of debt maturing beyond this point
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