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by yuan haixia, wang xiaomeng and zhang kun since the fourth quarter of 2023, the scale of overseas bond issuance by municipal investment companies[1] has been on an upward trend. under the tone of controlling growth and reducing reserves, why has the scale of overseas bond issuance by municipal investment companies increased instead of decreased? with the fed's interest rate hike, the financing cost of us dollar bonds continues to rise. however, against the background of the downward trend of benchmark interest rates and the continuous advancement of localized debt policies, the interest rates of domestic bonds issued by municipal investment companies have repeatedly hit new lows. why do municipal investment companies still choose to raise funds at high costs overseas? under multiple rounds of window guidance, what is the latest performance of municipal investment companies' overseas bonds? recently, it has been rumored on the internet that "document no. 134" will further regulate the overseas financing of municipal investment companies. what changes will occur in the subsequent municipal investment overseas bond market? this article attempts to explore the reasons behind it from the perspective of the current status and structural characteristics of the domestic and overseas bond markets of municipal investment companies, and deduce the possible policy trends and market risks of the subsequent overseas bond markets of municipal investment companies for reference.

1. with the high cost of issuing bonds overseas by municipal investment companies, why has the issuance scale increased against the trend?

since 2023, affected by factors such as the high us dollar benchmark interest rate, the tight qdii quota for domestic funds to be remitted overseas, and the high cost of locking in foreign exchange, the financing cost of urban investment overseas bonds has continued to rise relative to domestic bonds. from 2023 to july 2024, the weighted average coupon rate of newly issued 3-year urban investment rmb overseas bonds was 4.84%, while the weighted average coupon rate of newly issued domestic urban investment bonds of the same period was only 3.79%. however, contrary to the conventional trend of shrinking bond issuance due to rising financing costs, the issuance scale of urban investment overseas bonds has continued to rise since the fourth quarter of 2023. the reasons may be related to the following three factors:

(i) the approval document is valid for one year, and some municipal investment companies have postponed their issuance to this year

according to the "administrative measures for the review and registration of medium- and long-term foreign debts of enterprises" (ndrc order no. 56), the "review and registration certificate for foreign debt borrowed by enterprises" is valid for one year from the date of issuance and will automatically become invalid upon expiration. therefore, urban investment companies that obtain approval documents in 2023 must complete the issuance within this year. at the same time, as the regulatory policies for overseas debts continue to tighten, it has become more difficult to review and approve the approval documents for the foreign debts of urban investment companies, especially for district and county-level urban investment companies, which may tighten or even suspend their overseas debts. some urban investment companies that obtained approval documents before the tightening of supervision accelerated their issuance within the validity period of the approval documents, which to a certain extent led to an increase in the scale of issuance. from january to july 2024, the scale of urban investment companies' overseas debt issuance was us$27.457 billion, an increase of 70.92% over the same period last year.

(ii) due to high pressure from maturity, the demand for new and old municipal bonds to repay old ones has increased

from january to july 2024, the amount of maturing overseas bonds of urban investment companies was us$12.72 billion, an increase of about 10% over the same period last year, and the pressure of debt repayment when it matures is relatively high. in terms of the use of raised funds, the amount of overseas bonds issued by urban investment companies for the purpose of raising funds only for refinancing from january to july 2024 was us$9.878 billion[2], accounting for 35.98% of the issuance amount during the same period, an increase of 5.63 percentage points over 2023. among them, the amount of issuance clearly used to repay offshore debts was us$8.503 billion. from the perspective of minimizing costs, urban investment companies should use domestic funds to repay maturing overseas debts. however, after using domestic funds to repay overseas debts, the amount of urban investment companies' overseas debt will be reduced accordingly. in order to avoid the contraction of financing channels in the overseas debt market, some urban investment companies will still choose to bear high financing costs to roll over overseas bonds. in addition, the outflow of domestic funds needs to comply with the relevant national regulations on cross-border fund management and is subject to many restrictions.

(iii) domestic bond issuance is restricted, and some urban investment companies turn to overseas issuance

since the second half of 2023, under the background of repeated policy requirements of "strictly controlling new debts", further implementation of the list management of financing platforms, and gradual expansion of key debt reduction areas, the domestic financing of urban investment companies has been tightened, and "document no. 35", "document no. 47", "document no. 14" and other documents have been implemented one after another. combined with the high maturity scale, the net financing scale of urban investment companies' domestic bonds in the first half of 2024 fell sharply by 94.81% year-on-year. structural differentiation continues to exist. the net financing of urban investment companies at the district and county level and aa level and below has declined significantly, and the financing of low-level and weak-qualified urban investment companies has become more restricted [3]. considering that urban investment companies undertake important tasks in local infrastructure, they are still limited by their own insufficient hematopoietic capacity and limited support from local governments, so they still have a large funding gap. due to further restrictions on the issuance of domestic bonds and the use of funds raised by urban investment companies, the financing needs of urban investment companies cannot be fully and effectively met in the country. therefore, some low-rated, district- and county-level urban investment companies have turned to overseas bond markets for financing. from january to july 2024, 73 urban investment companies participated in offshore bond issuance for the first time, with a total issuance size of us$8.913 billion, accounting for 32.46% of the issuance size in the same period. considering the regional and administrative levels, the first issuance of urban investment companies is mainly at the district and county level, accounting for 72.60% of the number. there are relatively large numbers in shandong, jiangsu and henan, and more than half of the domestic entities are rated aa+ and aa.

2. under multiple rounds of window guidance, what is the latest performance of municipal investment and overseas bonds?

with the continuous promotion of the "package debt reduction" policy, the central government has issued documents to strengthen the review of the issuance of overseas bonds by urban investment companies since october 2023, and has carried out multiple rounds of window guidance. under the guidance of regulatory policies, the issuance of urban investment overseas bonds has shown the main characteristics of a decrease in the proportion of district and county levels, an extension of the issuance period, and a decrease in the proportion of standby certificate structures.

1. the proportion of bonds issued by the 12 key debt reduction provinces decreased, and the proportion at the district and county level decreased

since october 2023, the central government has issued documents to strengthen the review of the issuance of overseas bonds by urban investment companies. the 12 key debt reduction provinces [4] are strictly regulated as targets for strict control of the increase in overseas bonds. from january to july 2024, the total issuance scale of these key provinces accounted for 6.67%, a decrease of 3.14 percentage points from 2023. from the perspective of administrative level distribution, since march, the regulatory authorities have strengthened the regulation of the issuance of overseas bonds by district and county-level urban investment companies. although district and county-level urban investment companies are still the main issuers of overseas bonds, the proportion of issuance scale has decreased by 9.79 percentage points from 2023 to 50.14%, and the proportion of prefecture-level cities is 43.38%, an increase of 6.22 percentage points from 2023, and the administrative level has moved up. the regulatory authorities do not have too many requirements for ratings. the domestic ratings of municipal bonds issuing bonds overseas are still mainly medium and low. from january to july 2024, the aa+ issuance scale accounted for the highest proportion, which was 43.69%, but it was 3.16 percentage points lower than that in 2023. the aa issuance scale accounted for 15.51%, an increase of 0.98 percentage points from 2023, while the unrated issuance scale accounted for 13.89%, an increase of 2.38 percentage points.

(ii) “364 offshore bonds” were suspended, the issuance period was extended and dim sum bonds were preferred

since the issuance procedures of offshore bonds with a term of 364 days or less are relatively simple, in the second half of 2023, as the domestic financing channels of urban investment companies continued to shrink, the scale of "364 offshore bonds" issued by urban investment companies increased significantly and the cost was high. in january this year, in order to solve the problem of some companies taking advantage of policy loopholes to raise large-scale and high-cost debts, the regulatory authorities restricted the issuance of "364 offshore bonds" in some provinces. from january to july 2024, the issuance scale of offshore bonds with an issuance period of 1 year or less accounted for less than 6%, a significant decrease of 6.61 percentage points from 2023, while the issuance scale of offshore bonds with an issuance period of more than 3 years increased by 6.84 percentage points to 10.50%, and the overall issuance period was extended. in addition, affected by the fed's interest rate hike, the issuance cost of urban investment dollar bonds remained high, and the face interest rate of 3-year urban investment dollar bonds was about 157bp higher than that of rmb bonds with the same term. therefore, the willingness to issue offshore bonds denominated in us dollars in the primary market was limited, and the issuance of offshore bonds denominated in rmb increased. from january to july 2024, municipal investment companies issued us$15.071 billion in overseas rmb bonds, accounting for 54.89% of the issuance scale of municipal investment companies' overseas bonds in the same period, an increase of 1.70 percentage points from 2023. however, the qualifications of municipal investment companies' overseas bond issuers have continued to decline since the beginning of this year, resulting in an increase in the average issuance cost of rmb bonds, and the coupon gap with domestic bond issuance has widened to about 200bp.

(iii) regulatory restrictions on some banks providing standby letters of credit enhancement, and the proportion of municipal investment standby letters of credit issuance decreased

standby letter of credit issuance refers to commercial banks providing standby letters of credit for the bonds. if the bonds default, the issuing bank shall bear the repayment responsibility. as mentioned above, the municipal investment enterprises that issue overseas bonds are mainly district and county-level with medium and low ratings. in order to reduce issuance costs and interest expenses, they prefer the standby letter of credit structure in the issuance structure. in order to limit the debt scale of weak-qualified district and county-level municipal investment enterprises, in march this year, the regulatory authorities restricted some banks from providing credit standby letters to municipal investment enterprises that issue overseas bonds in an disorderly manner. affected by window guidance, the way banks use standby letters to enhance the credit of municipal investment enterprises is subject to certain restrictions. from january to july 2024, the scale of standby letter issuance accounted for 18.42%, a decrease of 9.36 percentage points from 2023, of which the district and county-level scale accounted for 58.27%, mainly in eastern regions such as jiangsu, shandong and zhejiang. it has become more difficult for municipal investment companies with relatively average credit qualifications to issue bonds, and they have to adopt other issuance structures. from january to july 2024, the proportion of municipal investment companies' overseas bonds issued directly accounted for 50.50%, an increase of 12.03 percentage points from 2023.

3. how do you view the municipal investment and overseas bond market after “document no. 134”?

since 2024, the supervision policy of overseas bonds of municipal investment companies has continued to tighten. although the latest guidance on overseas bond issuance of municipal investment companies has not yet been officially issued, judging from the recent policy trend, preventing and resolving hidden debt risks is the primary goal of overseas bond supervision, and it is expected that the supervision policy of overseas bonds may be further tightened. as the process of debt reduction continues to advance, the financing channels of municipal investment companies at home and abroad are more likely to tighten than to loosen. the financing channels of weak-qualified platforms that rely more on the overseas bond market or structured issuance may be significantly blocked. attention should be paid to the pressure of rolling over municipal investment debts and the possibility of risk transmission due to policy changes.

1. overseas bond issuance supervision may be closer to domestic supervision, and new debt will be strictly controlled in the future

although the latest guidance on the overseas bond issuance of municipal investment companies has not yet been officially released, judging from the recent policy trends, in order to prevent and resolve hidden debt risks, it is expected that overseas bonds will also move closer to the domestic debt regulatory policy. under the tone of "controlling growth and reducing storage", the subsequent overseas debt regulatory policy may be maintained or suppressed. on the one hand, considering that the average annual maturity of municipal investment overseas bonds in 2025-2026 is about us$39 billion, an increase of 28% from 2024, the debt repayment pressure is relatively large. document no. 134 of the state council allows the use of domestic bonds to borrow new and repay old overseas bonds, which can reduce the high interest pressure of overseas bonds, effectively reduce the comprehensive financing costs at home and abroad, ensure the overall liquidity of municipal investment companies, and keep the bottom line of no default risk in the bond market. on august 5, liupanshui minsheng industrial investment group co., ltd. announced plans to issue us$100 million in bonds and rmb 720 million in corporate bonds, which will be used specifically to replace the company's outstanding us$100 million overseas bonds. this is the first case after document no. 134 to clearly plan to repay overseas bonds by issuing domestic bonds, which may mean that the use of domestic bonds to repay overseas bonds will gradually be implemented. on the other hand, the regulatory authorities may restrict the further growth of the total amount of overseas debt of urban investment companies by setting hard targets and restricting the use of raised funds. since march, the regulatory authorities have strengthened the regulations on the issuance of overseas bonds by district and county-level urban investment companies. in principle, only new loans are allowed to repay old debts. at the same time, the state council document no. 134 stipulates that new overseas bonds with a maturity of less than one year are not allowed, which has imposed certain restrictions on this part of financing. overall, in order to prevent and resolve overseas debt risks, under the framework of ensuring the reasonable financing needs of urban investment companies, the regulatory authorities may comprehensively tighten the overseas financing of urban investment companies in areas with high debt risks and low-level and weak-qualified urban investment companies. in the future, urban investment companies' overseas bonds will enter the stock market.

(ii) with high financing costs, the pressure on interest payments by municipal investment companies has increased, and attention should be paid to liquidity risks caused by tightening financing

compared with domestic debt, the financing cost of overseas debt is higher. in the long run, it may increase the financial burden of urban investment enterprises and cause credit risk to rise. at the same time, the issuers of urban investment overseas debt are mainly municipal and district-level platforms. in particular, some urban investment entities with weak qualifications that do not have the ability to issue bonds have further increased their debt scale through non-market issuance, which has further accumulated credit risk. considering that the fundamentals of urban investment enterprises have not improved substantially, their own hematopoietic ability is still poor, and the roa of urban investment enterprises is far lower than the debt interest rate and is declining year by year. in 2023, the overall net profit of urban investment enterprises that issue bonds overseas will cover interest expenses by about 0.2 times, which is further down from the previous year. the overall stock of funds at the end of the period can theoretically only guarantee interest expenses for the past two years. after considering the reserves used for debt principal repayment and project expenditures, the interest payment guarantee may be even tighter[5].

due to limited domestic financing, the municipal investment companies that have turned to the overseas market with loose policies generally have weak qualifications and large differences in debt repayment ability. the potential credit risk is high. once the issuance of municipal investment overseas bonds is tightened, it is more likely to cause the release of liquidity risk. at the same time, the risk may be transmitted along the guarantee chain, equity chain, market expectations and other channels, accelerating the rise of regional and systemic risks. if standby certificates or guarantees are used for issuance, the risk may also spread along the guarantee or equity chain, causing the risk of domestic guarantee institutions or parent companies to rise. in addition, the credit risk of municipal investment is highly correlated with the credit risk of local governments. the release of municipal investment credit risk may aggravate the regional liquidity crisis and trigger systemic risks.

[1] the scope of urban investment companies defined in this article is based on the infrastructure investment and financing industry caliber of china chengxin international, and takes into account the gradual expansion of business types and the integration of more public utility and market-oriented businesses in the process of exploring market-oriented transformation of urban investment companies to improve their own capabilities. some public utility and comprehensive urban investment companies are included in the statistical sample to form a broad urban investment caliber. the data on urban investment companies’ overseas bonds used in this article are all from the dm database.

[2] for many newly issued municipal investment and financing companies’ overseas bonds, the disclosed uses of funds raised include debt repayment, liquidity replenishment, project investment, etc., making it difficult to distinguish the specific amounts. therefore, this article only counts the issuance scale of funds raised for refinancing purposes only, which is a relatively small statistical scope.

[3] china chengxin international research institute, “review and outlook of the municipal investment market in the first half of 2024: debt reduction continues to increase, net financing of municipal investment bonds drops by 90%, and attention is paid to investment contraction effects and transformation risks”, https://mp.weixin.qq.com/s/5fu1wd48x8e_lweijkrahw.

[4] tianjin, inner mongolia, liaoning, jilin, heilongjiang, guangxi, chongqing, guizhou, yunnan, gansu, qinghai, ningxia

[5] china chengxin asia pacific, “review and outlook of infrastructure financing policies in the first half of 2024: debt reduction work continues to advance, and financing of urban investment companies continues to differentiate”, https://mp.weixin.qq.com/s/mwrmznfre8u-zvuoo4lf_w.