(Yicai) Oct. 9 -- New debt issuance by Inner Mongolia Autonomous Region and Tianjin signal the start of this year’s special refinancing bond sales by China’s local governments and efforts to speed up work to resolve debt risks, according to insiders.

Inner Mongolia issued CNY66.3 billion (USD9.1 billion) of special refinancing bonds today, while Tianjin will sell around CNY30.6 billion of local government debt tomorrow, including CNY21 billion of refinancing bonds, a document published on ChinaBond.com showed. The funds raised through the refinancing bonds will be used to pay existing debt.

The total size of new special refinancing bonds issued by Chinese local governments is likely to reach more than CNY1 trillion (USD137.5 billion) and most will be sold in the fourth quarter of this year, according to many financial institutions.

Refinancing bonds were previously used mainly to repay the principal on maturing local government debts, and the specific debts to be repaid were usually named, an industry insider said, but since 2020, the purpose of some of these bonds is stated as “to repay outstanding debts.” 

These bonds are known as “special refinancing bonds” in the industry and are thought to replace hidden local government debt, the person noted.

July's meeting of China's top leadership proposed to effectively prevent and resolve local debt risks and formulate and implement a package plan. The following month, Finance Minister Liu Kun said central government finances would support local governments to resolve the risks from so-called “hidden” debts.

On Oct. 6 Inner Mongolia updated its prospectus released on Sept. 26, changing the stated purpose of the refinancing bonds to that of paying back existing debts.

In theory, the size of the special refinancing bonds for sale should be the difference between the local government debt limit and balance, but the scale of bonds issued by Inner Mongolia and Tianjin is much bigger.

Tianjin's debt limit was CNY200.6 billion as of the end of last year, and its debt balance was CNY199.5 billion, so the difference between the two was CNY1.1 billion, far lower than the CNY21 billion of refinancing bonds the city will issue, according to data from the city’s finance bureau.

Inner Mongolia's debt limit was CNY739.3 billion as of Sept. 27, and its debt balance was CNY687.7 billion, or a CNY51.7 billion difference between the two, which is smaller than the CNY66.3 billion refinancing bonds it issued, Sinolink Securities said in a research note.

The resumption of special refinancing bond sales at this time may be linked to regional risks and policy orientation, according to many industry insiders.

From a regional perspective, the municipal bonds of Tianjin and those of Guizhou and Yunnan provinces were higher risk. The outstanding interest-bearing municipal bonds Tianjin issued stood at CNY1.72 trillion (USD235.6 billion) until last year, ranking 18th in China. The share of its newly issued bonds for refinancing purposes rose from 74 percent in 2019 to 100 percent in 2022, according to figures compiled by a team led by Prof. Zhong Ninghua at Tongji University.

Editor: Martin Kadiev