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First-Quarter Economic Upturn
Special> First-Quarter Economic Upturn
UPDATED: April 28, 2009 NO. 17 APR. 30, 2000
Why Local Bonds Failed to Sell
To make the bonds more attractive, the governments must be fully clear about the investment target and ensure there is no interference in the usage of the funds




The Central Government is allowing all provincial governments to issue local bonds to help finance the construction of public welfare facilities. But so far investors haven't shown much interest in the bonds—the first of their kind to be issued in China. Ni Xiaolin, a senior commentator at Xinhua News Agency, discusses why in the following article she wrote for Beijing Review.

The prices of the first two local bonds issued by the governments of Xinjiang Uygur Autonomous Region and Anhui Province fell after they started officially trading on the market. It would be worthwhile to dig a little deeper into the cause of this.

As an important part of the $586-billion stimulus package launched by the Chinese Government, the 200-billion-yuan ($29 billion) worth of local bonds issued started trading in April. Their investment target is very specific. The State Council stated clearly that the local bonds should be used to finance local public welfare facilities in which the Central Government invests as well as other facilities that suit social interests but have difficulty obtaining private finance. Construction projects that are attractive to private investors are not allowed to use the funds raised from local bond sales.

Judging from the above-mentioned criteria, local bonds are relatively risk-free investments. Moreover, under China's current fiscal management system, local governments have no right to issue bonds to raise money. But this time, the Central Government made an exception to allow them to issue local bonds. The Ministry of Finance issues a certain amount of bonds and distributes them to local governments according to established quotas. The Ministry of Finance repays the principal and interest to investors as well as covers the distribution fees, so that the local bonds are less risky than other investments.

Xinjiang issued 3 billion yuan ($440 million) worth of bonds with a maturity of three years and interest of 1.61 percent. Anhui's bonds issued 4 billion yuan ($586 million) worth of bonds with the same maturity and 1.6-percent interest.

But investors in the secondary market did not show much interest in them. The first batch of Anhui bonds failed to find any buyers even when the price fell below their 100-yuan ($14.70) face value. The Xinjiang bonds fared a little better. A total of 840 million yuan ($123 million) worth of Xinjiang local bonds were traded, but most of the buyers were banks, and individual investors showed no interest.

The financial turmoil has not yet been stabilized; hence, the bonds should have been more attractive in the midst of the financial uncertainty. So, why then did they fail to attract investors?

First of all, the economic conditions have changed. The "better-than-expected" economic recovery made the low risk, low return bonds less appealing. The number of treasury bonds buyers also declined significantly in March.

Second, in terms of interest, the 1.60-1.65 percent interest rate of the local bonds was less competitive than the 3.73 percent for three-year treasury bonds as well as the three-year deposit interest rate of 3.33 percent.

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