Authors: Jiang Chao, du Jia

Source: Jiang Chao Macro Bond Research

The Politburo meeting on July 31 decided to implement a proactive fiscal policy and a prudent monetary policy, saying that fiscal policy should play a greater role in expanding domestic demand and structural adjustment. In connection with the executive meeting of the State Council on July 23, it was stated that the pro-active fiscal policy should be more active, and in the second half of the year, we will speed up the issuance of special bonds to promote infrastructure construction. It is not difficult to see that local special bonds will play an important role in the development of fiscal policy.

1．There is still a trillion yuan of special debt left during the year.

1.1 since the beginning of this year, local bond issuance has focused on debt replacement.

In the first half of the year, local bonds focused more on promoting debt replacement, and fewer new debt issues were issued.From the perspective of the purpose of raising funds from local bonds, from January to July this year, local bonds were mainly issued for replacement bonds, with a cumulative total of more than 1.37 trillion, while new bonds were only issued one after another in May, and the issuance volume gradually increased in June and July, totaling only about 800 billion. It can be seen that the previous local bond issuance work, more focused on promoting the debt swap process, while the new bond issuance is relatively small.

In particular, the cumulative issuance of new special bonds since the beginning of the year is only 100 billion yuan.Judging from the quota for general debt and special debt at the beginning of the year, the amount of local general debt will be increased by 830 billion and that of special debt by 1.35 trillion. However, judging from the issuance since the beginning of the year, local governments have issued a total of 663.9 billion new general bonds and only 148.5 billion new special bonds from January to July.

1.2 debt swap will continue to move forward, and special bonds will be greatly expanded.

Debt swap does not directly lead to new financing.In the first half of the year, the local debt swap is the focus, and the debt swap can not bring direct new financing. For example, after issuing local bonds to replace a debt of CIC, the financing originally planned by the platform company to repay the debt can be released to invest or replenish liquidity. in this case, the debt swap can indirectly increase the financing volume of the whole system. However, if the urban investment debt is replaced by local debt, the urban investment platform reduces its financing plan because of forgiving the debt, in which case the debt swap is only a concept of replacement and does not increase the financing amount of the whole system. In view of the tight financing environment of urban investment companies in the first half of this year, the probability of the latter is increasing, so the massive issuance of replacement bonds in the first half of this year does not contribute equally to new financing.

During the year, the replacement of local debt continued, and the method of resolving hidden debt remains to be determined.With the advance of the debt swap, the stock of government debt in the form of local non-government bonds was only 509.4 billion at the end of July 18, which has been significantly reduced from 1.7 trillion at the beginning of the year. In addition, there are about 570 billion local bonds maturing from August to December, and local governments can issue refinancing bonds. If this part is taken into account, the issuance of swapped bonds during the year is about 1.1 trillion.

This year, local government debt norms pay more attention to hidden debt, and various localities find out the scale of hidden debt, coupled with the fact that the Ministry of Finance did convert a small amount of contingent debt into government debt at the beginning of the year. Recently, according to Phoenix Finance and other media reports, opinions on preventing and defusing the risk of local government hidden debt have been issued, and how to resolve hidden debt has yet to be decided. Previously, the market looked forward to whether there would be a second round of debt swap, but we think that the scale of hidden debt is too large and all included in local government debt violates the principle of debt norms, so although we do not rule out the possibility that a small part of hidden debt will be redelimited under certain conditions, the delimited amount should not be particularly large.

The new special bond issuance will be greatly expanded and will gradually shift to the focus of local bond issuance during the year.The issuance of new bonds will gradually increase during the year, especially the new special bonds. Less than 150 billion of them have been issued since the beginning of the year, and there is still nearly 1.2 trillion of the issuance space under the existing quota. Under the policy tone of "speeding up the issuance of special bonds to promote infrastructure construction," the issuance of new special bonds this year will be promoted rapidly. The amount of new general debt has been relatively small, the amount given according to the local deficit at the beginning of the year is 830 billion, more than 660 billion has been issued from January to July, and the issuance space during the year has been very limited. Special bonds will become the focus of local debt issuance and an important channel of local financing.

The next three months may be the issue date of the special debt collection.The Ministry of Finance on the 14th issued opinions on how to do a good job in the shift of local governments to bond issuance, calling for speeding up the issuance and use of local government special bonds. The opinions require the provincial ministries of finance to grasp the pace of issuing special bonds, make scientific arrangements for the issuance plans for the next few months of this year, especially in August and September, and speed up the issuance progress. According to a person in charge of the Ministry of Finance, the progress of local government bond issuance this year is not limited by quarterly equilibrium requirements, and the cumulative proportion of new special bond issuance completed by various localities by the end of September should in principle not be less than 80%. The remaining quota should be mainly issued in October. This is consistent with the details of an informal version of the national conference on local special bonds reported by the media, which said that new special bonds were required to reach 400 billion in August, 80% in the third quarter of September, and the remaining 300 billion mainly in October.

In fact, as of August 20, 161 billion of new special bonds have been issued in various places in August, and another 141 billion have disclosed the issuance documents, which will be completed in the near future, totaling more than 300 billion.

two。 In what direction do local bonds go?

2.1 Analysis of local government stock debt investment

The Audit Commission has reported that as of2013年6Survey statistics on local government debt at the end of the monthAccording to the results of statistics at that time, the whole country was usedLand collection and storageThe total debt balance is 1.9 trillion yuan, accounting for 11.21% of the total debt balance, of which 1.7 trillion are responsible for repayment, accounting for 16.69% of the total debt repaid by local governments. At the end of June 2018, the amount of debt that local governments are responsible for repaying is 16.8 trillion. If the proportion of land acquisition and storage debt is close to that at the end of June 13, then the debt related to land storage may be 2.8 trillion.

Municipal construction(including urban road traffic, water, underground pipelines, sewage and garbage disposal, etc.) the proportion of related debts is also relatively high. by the end of June 13, the total debt balance of local governments for municipal construction was 5.8 trillion yuan, accounting for 34.6% of the total debt balance, of which 3.8 trillion were responsible for repayment, accounting for 37.5% of the total debt repaid by local governments. According to this ratio, it is estimated that by the end of June 18, the amount of debt repaid by local governments due to municipal construction across the country may be 6.3 trillion.

By the end of June 13, the country had usedConstruction of transportation facilitiesThe total debt balance is 4.1 trillion yuan, accounting for 24.43% of the total debt balance, of which 1.4 trillion are responsible for repayment, accounting for 13.78% of the total debt repaid by local governments. According to this ratio, it is estimated that by the end of June 18, the amount of debt liable for the construction of transportation facilities in the country may be 2.3 trillion, and the scale of contingent debt may be more.

In addition, there are also more related debts in the fields of indemnificatory housing, science, education, culture and health, agriculture, forestry and water conservancy construction, ecological environment and so on.

In terms of the latest debt investment, municipal construction, transportation, land storage and indemnificatory housing account for the highest proportion.Recently, many provinces have released statistics on the distribution of government debt in 2017. we found that the ratio of municipal construction-related debt to total debt in most provinces is 20%, 30%, followed by transportation-related debt. For example, transportation debts in Zhejiang, Gansu and Heilongjiang accounted for 17%, 18% and 14% respectively, and highway construction debts in Hunan and Anhui provinces accounted for 21% and 9% respectively.

Land acquisition and storage / land reserve-related debt occupies a place in the debt structure of each region, which is still about 10% on average. For example, in the debt investment announced by Zhejiang, Gansu and Heilongjiang at the end of 17 years, land reserve-related debt accounts for 11%. Anhui Province is 8%. In addition, the proportion of indemnificatory housing-related debt is also relatively high, with Zhejiang, Hunan, Gansu and Heilongjiang accounting for 14%, 12%, 12% and 15% respectively, especially in some provinces, such as Anhui and Ningxia. the proportion of indemnificatory housing debt is 26% and 22% respectively.

2.2 Special debt is an important source of capital construction funds.

We mentioned above that the new quota of the remaining local debt this year is mainly local special debt, and there is not much left of the new quota of general debt. So what is the investment of funds raised by local special bonds?

Special bonds are government bonds issued by local governments for public welfare projects with certain income and agreed to repay principal and interest with government funds or special income corresponding to public welfare projects within a certain period of time.Funds shall be incorporated into the budget management of government funds.

Most of the local government fund expenditure belongs to infrastructure construction expenditure.Government fund expenditure is an important supplementary part of general public finance. specifically, government fund expenditure mainly involves seven categories of expenditure: transportation facilities, water conservancy facilities, urban maintenance, public utilities development, immigration and social security, and ecological environment construction. in addition to the demolition compensation related to the land transfer fee, which accounted for 42% of the government fund expenditure in 2014. The detailed items of land transfer fee expenditure have not been published after 2015), most of which belong to infrastructure construction expenditure.

The funds of local special bonds are incorporated into the budget management of government funds, which is an important supplement to the income of government funds in recent years.The issuance of special bonds has gradually become one of the important sources of funds for infrastructure construction.

2.3 what specific areas does the special debt invest in?

Local special debt can be divided into special debt and project income special debt, the latter is a detailed variety of the former, which needs to directly correspond to project assets and income. In terms of issuance, the ratio of special bonds to project income special bonds in 2017 is about 2:1, and it has been about the same ratio since 18 years, but there has been continuous innovation in the variety of project income special bonds. We will look at the investment direction of the two separately:

Special debt fund-raising is mainly used in infrastructure construction and public service areas such as municipal construction, transportation, housing projects, ecological and environmental protection, rural revitalization and so on.The funds raised by special bonds can be used for the expenditure of public welfare projects, but there is no need to specify specific projects. By combing through the fund-raising investment in the disclosure documents of special bonds issued this year, we found that the funds raised were mostly used in infrastructure construction areas such as municipal construction, transportation, and indemnificatory housing construction, as well as three key projects related to rural revitalization, poverty alleviation, and ecological environmental protection.

The special debt for project income corresponds to specific areas and projects.Project income special debt is a subdivision of special debt. At the end of July 2017, the Ministry of Finance issued the Circular on the varieties of Local Government Special Bonds for self-balancing income and financing of pilot Development projects (Caiqian No. 89), proposing that local governments should issue project special bonds that directly correspond to project assets and income within the legal limit of special debt. The debt service sources of project income special bonds include government fund income and special income, and their corresponding projects should be able to generate sustained and stable cash flow income reflected by government fund income or special income, and cash flow income should be able to completely cover the scale of principal and interest service of special bonds.

At present, the project special debts directly launched by the Ministry of Finance include land reserve special debt, government toll road special debt and shed reform special debt.3A variety.Land reserve special bonds and toll road special bonds were launched on a pilot basis in June and July 17 by "measures for the Administration of Local Government Land Reserve Special Bonds (trial)" and No. 97 "measures for the Administration of Local Government Toll Road Special Bonds (trial)". The funds raised by the former are specially used for land reserve by the land reserve institutions that are included in the directory of the Ministry of Land and Resources. The income from the transfer of the right to the use of state-owned land or the income from the state-owned land income fund shall be reimbursed by the income corresponding to the budget management of the government fund The latter is specially used for the construction of government toll road projects to be repaid by corresponding vehicle toll income and special income.

On the other hand, the special debt for shed reform was issued on a pilot basis in April this year, and the background is that the country standardizes the financing of shed reform projects. The source of debt repayment funds is the income from the transfer of state-owned land use rights corresponding to the project and incorporated into the budget management of government funds, including the sales of supporting commercial facilities, leasing income and other income belonging to the government.

As of18年7At the end of the month, the accumulated amount of special bonds issued by the land reserve532.5It was issued by Tianjin, Guangdong, Liaoning and Hebei Province respectively. Only Shaanxi Province has issued the special debt for toll road.80The accumulative total issuance of special debt for shed reform21.68亿。This is related to the late launch of special bonds since the beginning of this year, and it is expected that there will be a substantial increase in the issuance of project income bonds this year.

The policy encourages local self-created varieties.8Since the beginning of this month, a number of project income special bonds have been centrally unveiled.Document No. 89 encourages places with conditions to be based on the reality of the region and actively explore the issuance of special bonds in the field of public welfare undertakings with certain returns, so as to repay them with corresponding government funds or special income, and one project will mature and promote another. On December 11, Shenzhen Rail Transit Special Bond was successfully issued, which was specially used for the construction of rail transit projects and repaid with the operating income corresponding to the project and incorporated into the budget management of government funds, land transfer along the line, development and other special income. It is a new variety of special debt explored and issued by local governments.

Since August this year, more and more provinces have launched new types of project income special debts. it includes the special debt for education project income launched by Yunnan Province and Shaanxi Province, the special debt for water resources allocation project in Guangdong Province, and the special debt for greenway / urban and rural water supply / rural revitalization / sewage treatment / industrial park in Sichuan Province. It can be expected that with the landing of one new variety of special debt after another, the variety of special debt will be further broadened in the future.

Summing up the characteristics of the existing project income special bonds, the possible areas of innovation of project income special bonds in the future should have the following characteristics: greater pressure on fiscal expenditure and high dependence on debt financing funds. at the same time, it can also generate more and stable cash flow income. Urban infrastructure construction (for urban roads, water, public hospitals and other infrastructure construction), transportation, such as airport construction, ecological and environmental protection and other areas are more in line with the above requirements, there are likely to be more innovative varieties in the future.

3. Where is the remaining amount of local debt?

The provinces with high debt mainly exchange debt, and the amount of new debt is less.The demand for infrastructure investment in China is divided regionally. On the whole, the urbanization rate in the eastern region is high, the growth rate of infrastructure investment is low, and the infrastructure in the central and western regions is weak and the construction demand is high. Last year, fixed asset investment in Guizhou and Xinjiang increased by 20%, Yunnan Province increased by 18% compared with the same period last year, and fixed asset investment in Shaanxi, Hunan, Guangxi, Jiangxi and other regions also grew by more than 12%. Are significantly higher than the national average.

However, the large demand and rapid growth of infrastructure investment in a region does not mean that it has more financing space. Infrastructure investment supported by debt tends to form a huge amount of debt, and the greater the risk of local debt. From the perspective of risk control, areas with high debt ratios of local governments, such as Guizhou, Liaoning, Ningxia, Hainan and Qinghai, add very few new debt limits every year, and the total local debt limits of these five provinces are all less than 30 billion in 2018. Jiangsu, Guangdong, Zhejiang and other areas have increased the quota by more than 100 billion.

Therefore, from the point of view of the setting of the local debt line, the main purpose of the local debt of the high debt provinces is to prevent risks, and the new debt line is less.

Judging from the situation of local bond issuance in various localities this year, the provinces that have issued more new bonds are Guangdong, Anhui, Hebei, Zhejiang and other central and eastern regions. Guizhou Province is the province with the largest issuance of replacement bonds, with a cumulative issuance volume of more than 168 billion, followed by Liaoning Province, with nearly 120 billion of replacement bonds issued, and Sichuan, Guangxi, Inner Mongolia and other regions also have a relatively large amount of replacement bonds.

The new special debt quota is relatively large in the central region.According to our collation, there are 25 provinces that have disclosed detailed data on the new local debt limit. Jiangsu Province has increased its special debt quota by 137 billion this year, and has not yet been issued by the end of July. At present, the remaining quota is much higher than that of other provinces, accounting for about 11.6% of the total remaining quota. In addition, the surplus quota of the central provinces including Hubei, Hebei, Henan and Anhui is also relatively high, and the total surplus quota of the four provinces accounts for about 21% of the whole country.

In the western provinces, except Sichuan Province, the new special debt lines are generally on the low side. For example, Yunnan and Guangxi have only 31.8 billion and 31.4 billion new special debt lines this year, while Xinjiang and Gansu have only more than 20 billion. Although Guizhou and Ningxia have not released detailed data, last year, the new special debt lines in the two regions were only 800 million and 1.3 billion respectively, and the total local debt limit this year has only increased by 8.5 billion and 20.9 billion respectively.