Reading Guide:
2021 is an extraordinary year in the development history of urban investment. From “red, orange and green” tightening the issuance of urban investment bonds to document No. 15 breaking the bottom illusion, the market has gradually realized the government’s determination to prevent and resolve hidden debt, and the market-oriented transformation of urban investment platform is imminent. How about the issuance of urban investment bonds this year? What marginal changes do local governments have in their willingness and ability to help? What is a special refinancing bond? What are the changes in the development logic of urban investment? What are the risks and possible investment opportunities of urban investment bonds next year? This paper focuses on answering the above questions.
Summary:
1、 Review of urban investment bonds in 2021: extreme differentiation
In recent years, due to the impact of credit events such as “Yongmei” and China Fortune Land Development Co.Ltd(600340) , investors’ fear of default has increased and their risk appetite has decreased, resulting in the phenomenon of “cluster” urban investment. In 2021, the implicit debt supervision was further tightened and the land market was cold, which led to the decline of local actual available financial resources. Although the local willingness to confirm payment was enhanced, the market investors had strong risk aversion, and the urban investment bond market showed polarization and uneven hot and cold on a provincial basis.
1. The overall issuance was large, but the net financing declined due to the impact of the maturity peak. From January to November, the issuance scale of urban investment bonds reached 5.3 trillion, a record high. However, affected by the large period and high refinancing demand, the net financing was only 1.8 trillion, a decrease of 3.5% over the same period in 2020.
2. Volume: the net financing of Jiangsu and Zhejiang accounts for more than half of the country, and the net repayment of 9 provinces and cities such as Tianjin and Yunnan. The net financing scale of urban investment bonds of Jiangsu and Zhejiang provinces from January to November reached 505.8 billion yuan and 459 billion yuan respectively, accounting for 52.6% of the country. Relatively speaking, 9 provinces and cities such as Tianjin, Yunnan and Liaoning showed net repayment. Among them, the issuance of urban investment bonds in Tianjin from January to November was 135.8 billion yuan, only 50% of the maturity scale. It is difficult for urban investment platforms in the region to repay the old by borrowing new ones, and there is great debt repayment pressure.
3. Price: the financing cost of strong regional urban investment is low, and the credit interest margin continues to narrow; The interest rate of urban investment bonds in weak regions is high, and the credit spread continues to expand. From the issue price of the primary market, the weighted average issue interest rate of urban investment bonds in Heilongjiang, Qinghai and Liaoning is higher than 6%, while that in Shanghai, Guangdong and Beijing is lower than 3.5%. From the perspective of credit spreads in the secondary market, since this year, the credit spreads of urban investment bonds in Beijing, Shanghai, Guangdong and other provinces and cities have continued to narrow, and are currently at a historical low below 50bp; The median credit spread of urban investment bonds in Guizhou, Qinghai, Liaoning and other provinces and cities continued to expand to more than 400bp, at an all-time high since 2015.
4. At present, local governments are caught in the contradiction between the enhancement of rescue willingness and the decline of rescue ability, and hope to replace the implicit debt by issuing special refinancing bonds. However, the special refinancing bonds did not fundamentally solve the problem of implicit debt, but more released the intention of policy “insurance” and alleviated the default risk of tail urban investment.
First, the maximum remaining space is 3.1 trillion, which is only equivalent to 5.4% of the interest bearing debt scale of the urban investment platform. By the end of 2020, the national local government debt balance was 25.7 trillion, the limit was 28.8 trillion, and the theoretical maximum issuance space was 3.1 trillion. However, it is far from the debt scale of the 58.3 trillion urban investment platform, equivalent to only 5.4%.
Second, the regional distribution is uneven, and the remaining amount is concentrated in provinces with less debt pressure such as Beijing, Shanghai and Guangdong. From the perspective of the gap between the debt limit and balance of each province, Beijing, Shanghai, Guangdong and other provinces with less debt pressure have more room to issue refinancing bonds to replace hidden bonds. By the end of 2020, it was 420.3 billion yuan, 283.2 billion yuan and 219 billion yuan respectively, accounting for 29.7% of the remaining amount in China; In heavily indebted areas such as Tianjin and Qinghai, the remaining space is less than 50 billion yuan.
2、 Three changes in the development of Urban Investment
Finance is half “finance” and half “politics”. To curb the expansion of local implicit debt and prevent and resolve the risk of local government debt is not only to solve the problem of the sustainability of local actual financial resources, but also to change the performance evaluation mechanism of local governments in the future, and how to better match the central and local powers, expenditure responsibilities and financial resources. Clearly divide powers, determine expenditure responsibilities and match corresponding financial resources.
The difficulty of finance is to expand expenditure at a faster speed while increasing income, and it is difficult to balance. To achieve the balance between economic growth and debt expansion, development and security, tax reduction and fee reduction and financial sustainability, it is a relatively long process for China to resolve local implicit debt, which can not be achieved overnight. We should dialectically look at the relationship between development and local implicit debt, reduce risks by promoting the market-oriented transformation of urban investment platform in development, improve the efficiency of debt and expenditure, rather than directly and roughly reduce the debt scale, let alone trigger new risks in order to prevent old risks.
Times are changing and urban investment is also changing. In the past, urban investment platform was an important carrier of implicit debt, and the debt of urban investment platform included the main part of local government implicit debt. With the decline of the attributes of local financing platforms of urban investment and the improvement of enterprise attributes, urban investment bonds will move closer from “quasi municipal bonds” to “industrial bonds” in the future, exchange time for space, and reduce the risk of local implicit debt in development.
1. Change of positioning: from “government financing platform” to “market-oriented operation”. In the past, urban investment was the financing platform and local investment tool of local governments, bearing the responsibility of huge government expenditure. With the deepening of implicit debt resolution, the government financing function of urban investment platform is gradually stripped off, the relationship between urban investment and the government will be reshaped, and the positioning of the platform will change from “government financing platform” to “market-oriented operation”.
2. Business change: from “government agency construction” to “industrial investment”. At present, the tide of agent construction business of urban investment is ebbing. In the future, there are two possible transformation directions of Urban Investment:
First, fill in the real estate, layout indemnificatory housing and urban renewal. With the return of the real estate market to its original source, long-term rental housing and affordable housing with strong public welfare are becoming more and more important. With its own regional advantages, CIC can participate in the linkage development of infrastructure and real estate, and explore new business models such as urban renewal and regional development.
Second, keep up with the pace of the times and layout strategic emerging industries. With the transformation of urban investment into the key areas and deep-water areas, the key to the successful transformation of urban investment lies in whether it can move from the “financing end” to the “investment end”. As an important pillar of local economy, urban investment should not be limited to traditional infrastructure construction. It should actively participate in industrial investment, share the dividends of local economic development and solve the debt problem in development.
3. Logical change: from “the worse, the more you buy” to “individual coupon screening”. In the future, the attribute of urban investment bonds will gradually move from “quasi municipal bonds” to “industrial bonds”, and the urban investment platform is facing individual differentiation. Therefore, investing in urban investment bonds needs the ability of “individual bond screening”, pays attention to the business, liquidity, solvency and other financial indicators of the urban investment platform, and the investment logic also tends to industrial bonds.
3、 2022 urban investment bond outlook and investment strategy: reduce default risk and focus on valuation risk
1. On the whole, the refinancing pressure of urban investment bonds is weakened in 2022, and the maturity scale is lower than that in 2021, but the distribution is more concentrated. The maturity of urban investment bonds in 2022 is 2.8 trillion, a decrease of 25% compared with 2021.
In terms of time, the maturity pressure of urban investment bonds is large in March, April and August next year, and the maturity scale is more than 300 billion yuan.
Regionally, the refinancing pressure of urban investment bonds in Qinghai, Gansu, Yunnan, Inner Mongolia and Tianjin in 2022 is large, and the proportion of maturity scale in the stock scale is more than 30%.
In terms of industry, it focuses on architectural decoration, comprehensive and transportation. The maturity scale of the three industries accounts for 86.4% of the total maturity scale.
2. Investment suggestion: reduce default risk and focus on valuation adjustment risk
Looking forward to 2022, there will be great pressure on steady growth, and it is the first year after the change of local governments. The willingness of local governments to guarantee and redeem will be strengthened, the superimposed refinancing pressure will be slowed down, and the overall default risk of urban investment bonds will be reduced, but attention should be paid to key regions and valuation fluctuation risk. First, debt repayment pressure may increase in areas with high land dependence and high debt ratio. For example, in Tianjin, Guizhou, Hunan, Guangxi and other provinces, the decline in land transfer income weakens the solvency of local governments.
Second, strong regional weak urban investment faces valuation adjustment risk. This year, affected by the rush to raise funds for strong regional urban investment, the urban investment spread in strong regions has reached a historical low, but after returning to rationality, the valuation adjustment risk of weak urban investment in the region is high.
It is suggested to pay attention to areas with smooth refinancing and low land financial dependence, and local governments clearly support the development of local urban investment, which can appropriately sink and thicken the income, such as Shanxi, Henan, Shaanxi and other provinces.
Risk tip: statistical error caused by untimely data update and accelerated pace of resolving hidden debt
