Urban Investment Bonds
Nobel Prize Winning Economist & Stanford Professor Paul Romer. On Hyperinflation & Protecting Science
1. The generation of urban investment bonds
After the 1990s, in the process of urban modernization, the reform of the tax-sharing system and the rapid urban construction have caused the fiscal deficit rate of local governments in China to continue to rise. On the stage, it alleviated the plight of insufficient funds in the municipal construction of local governments in China to a certain extent and played a role in promoting the development of China’s local economy. Especially in recent years, China’s local economic development has accelerated, and local government debt has grown rapidly. Urban investment bonds issued by local government financing platform companies have largely filled the financial gap and promoted the construction of local public facilities and local economic development.
Large-scale growth of urban investment bonds appeared under the stimulus of “4 trillion” after the ” subprime mortgage crisis “. Before that, there was no complete domestic law to regulate the issuance of urban investment bonds. Recently, the Ministry of Finance issued the “Opinions on Doing a Good Job in the Issuance of Local Government Special Bonds”, the General Office of the CPC Central Committee and the General Office of the State Council issued the “Notice on Doing a Good Job in the Issuance of Local Government Special Bonds and Project Supporting Financing”, and then the Ministry of Finance issued A series of rules and regulations, such as the “Notice on Matters Concerning Effectively Strengthening the Implementation of Local Budgets and Safety Management of Fiscal Funds”, make the operation of urban investment bonds more transparent and reasonable, and effectively protect the legitimate rights and interests of issuers and investors.
(1). The size of urban investment bonds.
China’s urban investment bonds began with the Pudong Construction Bonds issued in 1992. Since then, Chongqing, Jiangsu and Zhejiang have also issued urban investment bonds to ease financial pressure. Before the ” subprime mortgage crisis” broke out, the domestic issuance of urban investment bonds was about 300 billion yuan, but to cope with the impact of the financial crisis, the central government proposed a “4 trillion” plan, and urban investment bonds assumed the 40% of the source of funds, since then the scale of urban investment bonds has increased day by day.
From the perspective of issuance scale, since 195 funds were issued to raise 322.33 billion yuan in 2009, 3,909 funds were issued to raise 3,237.154 billion yuan in 2019, and the annual raised funds increased by more than 9 times. From the perspective of the balance of bonds, at the end of 2009, there were 129 debt deposits with a balance of 192.46 billion yuan. By the end of 2019, the number of debt deposits was 10,586, and the balance reached 8,716.237 billion yuan. The bond balance increased by 44.29% in 11 years. times.
(2). The credit rating of urban investment bonds.
According to the data, in terms of total issuance, in 2009, the issuance of AAA-rated bonds accounted for 33.51%, and the issuance of AA+ bonds accounted for 22.62%. By 2019, the proportion of AAA-rated bonds issued rose to 38.66%. The proportion of AA+ bond issuance rose to 34.54%. With the further improvement of various rules and regulations, the proportion of urban investment bonds with high credit ratings has gradually increased, indicating that the risk protection of China’s urban investment bond market has become more complete, and the risk level has further decreased.
(3). The issuance rate of urban investment bonds.
China’s urban investment bonds have the dual characteristics of government compensation (before the promulgation of the new “Budget Law”) and non-tax-exemption. Therefore, compared with some foreign urban investment bonds, the interest rate level of domestic urban investment bonds is relatively high. A relatively high interest rate level will increase the fiscal pressure on local governments, which will lead to an increase in the level of debt risk. The average issuance rate in 2009 was 5.79%, and it soared to 6.72% in 2014. With the further regulation of the market and the improvement of the general environment, it fell to 4.91% in 2019. Judging from the current trend, the interest rate of Urban investment bonds will be at a relatively low level for a period in the future.
2. Factors affecting the credit spread of urban investment bonds
(1). Macroeconomic factors.
The credit spread is based on the yield of treasury bonds, and the difference between the yield of corporate bonds and the yield of treasury bonds is used as the credit spread. Obviously, the larger the credit spread, the greater the risk of default. We think it is the market risk-free interest rate, which includes bondholders’ confidence in the overall macroeconomic development trend, inflation expectations and the overall development of the country. Therefore, as a source of funds for local governments to alleviate the funding gap and carry out local infrastructure construction, the development of urban investment bonds is deeply affected by the country’s macro-economy and government fiscal policies. These include GDP, money supply (M2), price index, stock market sentiment, etc.
(2). Local economic situation.
Since most of the urban investment bond funds are currently used for local infrastructure construction, the state of local economic development affects people’s expectations for bond default risks. If the local economy develops well, the fiscal revenue is high, and the support for local financing platforms is higher, then the smaller the credit spread of the issued urban investment bonds. The influencing factors mainly include local fiscal revenue and expenditure, local government debt burden and government administrative level.
(3). Issuer factors.
Urban investment bond companies issue urban investment bonds. When issuing urban investment bonds, the issuer will also have an impact on the spread of urban investment bonds. For example, the solvency of urban investment companies, and their asset-liability ratio reflects the financial risk of the main body of the enterprise. size, the higher the debt, the weaker its ability to repay after the bond defaults, and the larger its interest rate spread; the ROE of a city investment company shows the percentage of its net profit and net assets, reflecting the company’s Operational efficiency and comprehensive profitability of shareholders’ equity; the cash flow of urban investment companies will also affect the spread of urban investment bonds. The cash flow reflects the liquidity of the company. The better the liquidity, the better the solvency, and the smaller the spread.
(4). The urban investment bond itself.
The first impact of the bond itself is the issuance period. The debtor repays the principal and interest at the due date. The longer the issuance period, the greater the risk of the issuer and the market risk. The longer the issuance period, the larger the interest rate spread. The issuance scale of bonds refers to the total face value of the bond itself. The bond issuer determines the size of the issuance amount according to the capital needs and the bond market environment. The bigger the bond, the bigger the bond credit spread.
The bond rating also affects the credit spread of the bond. For the issuer, the credit rating is the rating agency’s assessment of its default risk, and its rating has a direct impact on the issuer’s financing cost, because the credit rating affects the investor’s perception of the bond. risk estimates, thereby affecting the expected return on bonds.
Finally, there is the bond guarantee method. Guarantee is a credit enhancement for bond issuance, which can usually effectively improve the rating of the guaranteed bonds. Through guarantees, the possibility of default of urban investment bonds is reduced and the possibility of repayment is enhanced. The guarantees in urban investment bonds are generally divided into self-owned asset guarantees, Urban Investment Enterprise Guarantee and Third-Party Guarantee. Due to the existence of the guarantee, the default risk is reduced, so the investor’s compensation for the risk is lower, and the credit spread of the urban investment bond is lower.
3. Analysis of risk factors for the default of urban investment bonds in China
affect the default risk of urban investment bonds, but they mainly come from the issuers and local governments. At present, most of the funds raised by China’s urban investment bonds are used for public service projects, and these projects often have a worrying level of profitability and poor cash flow, making the issuer unable to repay the principal and interest at all.
However, some studies have found that the level of profitability will not Affect the issue price of bonds. With the further expansion of the scale of urban investment bonds, some issuers with lower credit ratings have also participated, resulting in a mixed market. on the market. Before the promulgation of the new “Budget Law” in 2015, urban investment bonds as “quasi-municipal bonds” could be guaranteed by the local government, but after that, the local government was not allowed to provide guarantees for urban investment bonds, which led to the default risk level of bonds has risen sharply.
Local governments with better financial conditions can reduce the issuance spread of urban investment bonds, and vice versa will increase the issuance spread of urban investment bonds. At the current stage of development, the financial situation of different local governments varies greatly. The financial situation of the eastern coastal areas is relatively good, followed by the central region, and the western region is relatively poor. This makes investors have different expectations for urban investment bonds, which in turn leads to differences in the issuance and pricing of urban investment bonds, and their risk levels are also different.
4. Analysis of specific single urban investment bonds
This paper selects the urban investment bond ” 20 Suzhou Rail Transit MTN001 ” with a remaining term of 4.44 years, a coupon rate of 3.83%, a bond rating of AAA, and the issuer is Suzhou Rail Transit Group Co., Ltd. Let us first consider the macroeconomic situation.
At the beginning of 2020, the new crown epidemic broke out in our country. To cope with this dangerous epidemic, the whole country opened a closed model. It was not until March that some regions began to resume work and production. There is no doubt that this epidemic will affect the national production in China in the first quarter.
The total value has had a serious impact. We can also see from the interest spread chart that from the end of April to mid-May, based on the beginning of the resumption of work and production and the steady rise in the country’s economic situation, the interest rate spread of urban investment bonds also showed an overall trend. However, with the further recovery of the stock market at the end of May and the arrival of the bull market, investors gradually transferred their funds to the stock market in a better form, and the interest rate spread of Gucheng Investment Bonds gradually decreased.
Local economic situation
The city investment bond issuance area we selected is in Jiangsu Province, and Jiangsu Province is in the eastern part of the coast of China. The economic development of various regions in the province and city is good and balanced. Moreover, while Suzhou City is in the southern part of Jiangsu Province and faces Shanghai in the east. The economic development level Very high, with a resident population of 10.7217 million at the end of 2018. In 2018, Suzhou City achieved a GDP of 1,859.747 billion yuan. Furthermore, a growth rate of 7.0%. And the total GDP accounted for 20.08% of Jiangsu Province, ranking first in the province.
In 2018, Suzhou’s fixed asset investment was 455.6 billion yuan, a growth rate of 4.5%. Of which real estate development investment was 255.8 billion yuan, a growth rate of 10.9%. The Suzhou Municipal Government has good financial strength and a moderate debt burden. Suzhou’s comprehensive financial resources in 2018 were 364.38 billion yuan. In 2018, the general budget revenue was 212.00 billion yuan. Of which tax revenue was 192.95-billion-yuan, accounting for a high proportion; government fund revenue was 169.10 billion yuan.
In that year, Suzhou’s general budget expenditure was 195.28 billion yuan. The government’s balance of payments was 108.56%, and the self-sufficiency rate was very high. At the end of 2018, the debt of Suzhou Municipal Government was 22.642 billion yuan. With a ratio of 37.41% to its comprehensive financial resources; the interest-bearing debt/comprehensive financial resources of government-affiliated financing platforms was 167.40%, and the overall debt burden was average.
More Issuer Factors
The issuer of ” 20 Suzhou Rail Transit MTN001 ” selected in this article is Suzhou Rail Transit Group Co., Ltd. Moreover, which is a local state-owned enterprise. From the figure, we can see that although the current asset-liability ratio of its issuing company is lower than the 50th percentile , that is, at a poor level, but because its operating income growth rate is in the 90th percentile, its income level will be greatly improved in the future, and its asset-liability ratio is only lower than the 50th percentile , so we have reason to be optimistic about the future solvency of its issuing company, and the gross profit margin of Suzhou Rail Transit Group Co., Ltd. is in the 90th percentile of the industry, which is the maximum value.
Therefore, the operating efficiency and comprehensive profitability of the company’s shareholders’ equity are very good. , and finally the current ratio of corporate funds is below the 50th percentile value at this point or even close to the 5th percentile value is a relatively backward indicator. However, as the issuing company is the only rail transit construction and operation entity in Suzhou, the company continues to receive support from the Suzhou Municipal Government, including project capital and fare subsidies. etc., the strong government support has created a favorable development environment for the company, so overall, I believe that the solvency of the issuing company selected by Urban investment is guaranteed.
In conclusion, after the above analysis. Moreover, I believe that the selected bonds are based on a sound local economy. Moreover, strong government support. In addition, their own relatively good operating income growth rate and gross profit margin. It is an urban investment bond that will be more stable in the near future, so it is worth investing.