Opinions of the Ministry of Finance on the Proper Issuance of Special Bonds by Local Governments (Cai Ku [2018] No. 72) (Mainland China)

Karl Zhang

To expedite the issuance and use of special bonds (the “Special Bonds”) by local governments and for the better performance of the Special Bonds in their function to stabilize investment, expand domestic demands and improve weaknesses, the Ministry of Finance issued instructions concerning the issuance of special bonds by releasing the Opinions on Proper Issuance of Special Bonds by Local Governments (the “Opinions”) on August 14, 2018.  The Opinions are specifically highlighted below.

1. Accelerating the issuance of Special Bonds

The Opinions is requiring accelerated issuance of Special Bonds, and that there will be no quarterly equilibrium requirement with the issuance progress of local government bonds (the “Local Bonds”).  The issuance proportion of new Special Bonds cumulatively issued by local governments as of the end of September shall in principle not be less than 80%, and the remaining issuance quota shall be mostly issued in October.

2. Raising the marketization level of Special Bond issuance

The Opinions also indicate that to raise the marketization level of Special Bond issuance, i.e., to require their prices to be determined by the market, the issuer shall choose the issuance method, such as bidding or open underwriting, while the underwriters shall make their offers and participate in biddings after having generally considered the market factors.  Local financial authorities shall not artificially create price reduction pressure on underwriters by means of financial deposits.

3. Optimizing the bond issuing procedure

The Opinions require provincial financial authorities to negotiate the issuing time for the Local Bonds (including general bonds or Special Bonds) with the place of issuance at least seven work days prior to the issuance, and the place of issuance shall in principle provide a confirmation on a “first-come-first-negotiated” basis.  Local governments may enhance the efficiency of bond issuance by collectively issuing Special Bonds of the same category for different municipalities and counties in the same province.  The Ministry of Finance will no longer limit the term structure of Special Bonds, and local governments are free to reasonably determine their duration based on the demand from project construction and the bond market.  If the place of issuance is not in Beijing, the Ministry of Finance authorizes the local provincial financial authority of the place of issuance to notify the local financial ombudsman office in writing for sending an observer to the place of issuance no later than 3 working days before the issuance.

4. Streamlining the information disclosure procedure for bonds

Regarding the bond issuance procedure, the Opinions state that the provincial financial authorities should timely disclose information relating to the issuance of the Local Bonds on websites such as their own department websites and the China Bond Information Network, and it is no longer required to record the required information disclosure documents with the Ministry of Finance.

5. Expediting the appropriation and use of the Special Bond funds

To realize the benefits of the Special Bonds as soon as possible, the Opinions are asking financial authorities at all levels to arrange for the use of income from the Special Bonds in a timely manner, speed up the appropriation of Special Bond funds, and prevent funds from staying in the national treasury for an extended time.  Before the Local Bonds are issued, local governments may, subject to certain conditions, conditionally mobilize budgeted bond funds for treasury payment to accelerate project construction progress and timely recompense the treasury after the bond is issued.

6. Strengthening the reporting of bond information

Meanwhile, to monitor the issuance status of the Local Bonds, the Opinions require the provincial financial authorities to submit a new Special Bond issuance plan for the next month by the end of each month this year and to submit plan arrangements such as the issuance time, size, type and term structure of the Local Bond six working days prior to its issuance.

The promulgation of the Opinions shows how the Ministry of Finance has provided a very strong boost to the issuance of the Special Bonds.  Enterprises or individuals interested in government bond investment may follow further developments in this area.