Recently, the introduction of a new policy, the local government debt replacement. Many people are unfamiliar with the replacement of debt, in fact, is a way to shift the risk of debt. Then, the legal consequences of debt replacementWhat is the meaning of that? Today, Chinese law net the following to answer your questions, I hope to help you.
As the local government debt management measures of transition to the new framework, the Ministry of Finance recently issued a local stock of 1 trillion yuan of debt replacement bond amount, with partial replacement as of June 30, 2013 the local government bears the responsibility to repay the debt stock of debt expires at the end of the year 1 trillion and 860 billion. These bonds will be issued in accordance with the principles of marketization in the inter-bank and exchange bond market, and encourage qualified institutional investors and individuals to buy. According to the Ministry of Finance estimates, after the replacement of local government can reduce the interest burden of 40 billion -500 billion yuan; if the first replacement success, the Ministry of Finance and may further expand the scale of replacement.
Local government debt replacement is not the Chinese version of QE, in essence, is a debt restructuring and asset securitization. Unlike some news reports and market reviews, we believe that the 1 trillion local government debt replacement does not mean that the central bank will rescue the local government, or will directly buy local government debt. In fact, the people's Bank of China Law stipulates that the central bank may not directly subscribe for government bonds. The essence of debt replacement is to let the local government through the direct issue of bonds to replace the stock of debt or refinancing, and after the stock of debt primarily through local financing platform through bank loans or trust accumulated. Similar to the general debt restructuring, after the replacement of local government debt will be extended, interest rates will be reduced. In addition, bank loans or credit assets by changing into bonds can be traded directly on the market, its liquidity will be greatly improved.
Who is going to buy replacement bonds? The current inter-bank bond market bonds accounted for 95% of the market, including the 2/3 bonds held by banks, the remainder held by securities companies, asset management funds, pension funds, insurance companies, finance companies and other financial and non financial institutions. So banks and other institutions will still be the main buyers of the replacement bond. In addition, the decision of the social security fund in the near future to the local government debt investment ratio increased from 10% to 20%, which means that the social security fund can be an additional purchase of 3000-4000 billion local government debt. Taking into account the high rate of domestic savings, bank lending is still regulated, we believe that the purchase of the domestic liquidity and demand for replacement bonds are more adequate, so the central bank does not need to buy direct replacement bonds. More importantly, raise funds will be used to repay the stock of debt principal, the replacement process does not produce net debt, so the central bank does not need to inject new liquidity.
However, the bond market is small (2014 including platform bonds, corporate bonds issued a total of 4 more than 1 trillion, net issuance of only 556 billion), and 1 trillion issue of local government debt is likely to push up the overall bond market yields. So we think it is necessary for the central bank to provide sufficient liquidity support in bonds, to weaken the interbank market interest rate, the interest rate to avoid unnecessary rise; and after the replacement in the adjustment of the size of bank lending to avoid excessive credit expansion. This means that the replacement of the central bank and other ministries need to close cooperation and coordination.
We believe that debt replacement is an important step in the restructuring of local government debt, and the size of the future replacement should continue to expand. We estimate that at the end of 2014 when the original caliber of local government debt stock reached 21 trillion, of which the local government bears the responsibility to repay the debts of at least $11 trillion (the remainder may be classified into the corporate sector debt), the average interest rate of 6.5-7%. In contrast, the current 3-5 years of the city voted bonds yields only about 4.7% (Figure 1). Therefore, if the replacement of 10 trillion of the stock of debt, the annual local government interest burden will be expected to reduce by 300 billion yuan. In addition, the debt period is extended to 3-5 years after 7-15 years, the annual principal repayment burden will be reduced by 800 billion -1 trillion yuan. In view of the real estate market continued to decline, revenue growth is sluggish, the local government will also interest burden is heavy, high cost, short term debt scale replacement for lower cost and longer term bonds can alleviate the financial burden on local debt, enhance the sustainability of the formation rate and delay of non-performing loans.
We expect the bank to benefit from a massive debt replacement. At present, many investors are worried about whether banks and other local government creditors will be forced to replace the debt held by the low interest rates of local government debt, loss of part of the interest income. In our view, although interest income may be reduced, but the bank will benefit from the decline in the size of the risk of assets, capital adequacy ratio to improve, improve mobility, as well as asset quality improvement.
First, bond replacement can reduce the size of bank risk assets, improve capital adequacy ratio. The current local government debt held by the bank is mainly risk weight of 100% of the local government financing platform for bank loans, and the replacement of local government bonds after the risk of government bonds is only 20%. We estimate the capital adequacy ratio of 5 trillion bank loans per replacement will increase 0.6-0.7%. Secondly, the current local government debt is mainly for bank loans and trust loans, liquidity is poor, and after the replacement of local government bonds can be traded directly on the market. In addition, unlike bank loans, bond investment does not belong to the loan to deposit ratio, so if the loan is replaced as a bond, the bank can reduce the loan to deposit ratio, improve liquidity. We estimate that the loan to deposit ratio of the banking system will be reduced by 4 percentage points to 5 trillion per cent. Finally, debt replacement can improve the sustainability of local government debt, credit risk and non-performing loansThe generation rate of money will also be significantly reduced, the overall asset quality of the banking system should be improved. We expect investors to be more concerned about the quality of bank assets, not just profitability.
Overall, the local government debt replacement can not only reduce the local financial pressure, improve debt sustainability, but also is expected to be positive through a variety of channels of good banking system. Therefore, we believe that the future replacement of the scale will continue to expand on the basis of the current 1 trillion. At the same time, in order to avoid pushing up the market rate of return, local governments and banks and other creditors may also be directly negotiated by way of debt replacement.