The Ministry of Finance stated at a press conference that various debt resolution measures will be implemented in the future, and mentioned that this round of debt resolution policies is the strongest support for debt resolution in recent years. For the bond market, the signal for debt resolution has been clarified, market confidence has been boosted again, and the spread of urban investment bonds has once again shown a downward trend; the collection cycle of accounts receivable in the industrial bond sector is expected to be shortened, and asset liquidity may be improved; urban and rural commercial banks and local AMCs actively participate in debt resolution, and profits and asset quality repair are also beneficial to financial bonds. For the equity market, since 2024, due to debt resolution policies, local governments have limited room for debt maneuvering, and it is difficult for local governments alone to introduce large-scale stable growth policies. Under the new round of debt resolution policies, the room for local governments to maneuver has increased, which can better repay corporate debts and boost corporate operational confidence; on the other hand, it can also promote consumer spending through incremental policies, accelerate the internal circulation of the economy, support economic growth, and thus boost market confidence.
▍Fiscal debt resolution is implemented.
On October 12, 2024, the Ministry of Finance held a press conference, mentioning "to grasp the resolution of local government debt risks. The main responsibility of the local government is to be consolidated, and various debt resolution measures should be implemented according to one province, one policy, to support local governments, especially high-risk areas, to resolve existing debt risks and clear arrears to enterprises, etc. The overall risk of local debt has been alleviated, and the debt resolution work has achieved phased results." The press conference mentioned that a one-time increase in the debt limit on a large scale to replace the existing implicit debt of local governments is the strongest support for debt resolution in recent years. From September to December 2023, the total issuance scale of special refinancing bonds was about 1.4 trillion yuan, which is the largest scale of special refinancing bond issuance since 2020. In September 2024, Guizhou issued 4.5 billion yuan of special refinancing bonds, which was the special refinancing bond that started again after a three-month hiatus since June, marking the renewed effort of this round of debt resolution policies.
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▍How does debt resolution affect the stock and bond markets.
In September 2024, as the credit bond market continued to adjust, the spread between high and low-grade urban investment bonds gradually widened, reaching the highest level of 83.39 basis points since June 2024 on October 12. After the Ministry of Finance implemented the debt resolution policy on October 12, the signal for debt resolution was clear, and the confidence in the urban investment market was boosted again, so the spread of urban investment bonds showed a downward trend again. Among them, the spread between high-grade and medium-low-grade urban investment bonds was quickly compressed, reaching 70.39 basis points on October 16, down 13 basis points from the high point on the 12th. For the equity market, under the new round of debt resolution policies, the room for local governments to maneuver has increased, which can better repay corporate debts and boost corporate operational confidence; on the other hand, it can also promote consumer spending through incremental policies, accelerate the internal circulation of the economy, support economic growth, and thus boost confidence in the equity market.
▍Which other sectors benefit from this.
According to the 2024 mid-year reports of various companies, we have selected 1,284 A-share listed companies that disclosed the specific names of the top five accounts receivable parties, and summarized the total amount of accounts receivable from the government and its branches to the listed companies. From the perspective of proportion, the proportion of government accounts receivable in industries such as public utilities, transportation, construction, and computers is higher than 1.5%. Assuming that the industry distribution of listed companies' government accounts receivable is similar to that of credit entities, we believe that for sectors and industries with a high proportion of government accounts receivable, under the background of debt resolution, their accounts receivable collection cycle is expected to be shortened, asset liquidity may be improved, credit risk pricing may be repaired accordingly, and thus they may obtain excess returns. Among them, the existing bond scale of construction engineering, transportation, and public utilities industries is relatively large, all exceeding 2 trillion yuan. In addition, under the background of debt resolution, urban and rural commercial banks and local AMCs actively participate in the debt resolution process, and their profits and asset quality are expected to be improved, and they are also expected to obtain excess returns.
▍How to invest in credit after debt resolution.
For the urban investment market, in the short term, it is still necessary to pay attention to the impact of incremental stable growth policies on the credit market, and it is recommended to pay attention to the configuration value of urban investment bonds in key provinces with short-term debt resolution. For institutions with more stable liabilities, the duration can be appropriately extended to 2-3 years, and the configuration value of county-level urban investment bonds in the central quality zone can be paid attention to. In addition, the current overseas urban investment dollar bonds, dim sum bonds and other varieties still have a high spread with domestic bonds, and the configuration value of overseas urban investment bonds can be actively paid attention to. For non-urban investment sector credit bonds, the configuration value of existing bonds of large urban and rural commercial banks and local AMCs in key provinces with a duration of about 3 years can be paid attention to. In terms of industrial bonds, the configuration value of short-term 1-2 year existing bonds of local state-owned enterprises in industries with close business relations with local governments, such as construction engineering, transportation, and public utilities, can be paid attention to.
▍Risk factors:The central bank's monetary policy exceeded expectations; the pace of macroeconomic recovery was slower than anticipated; domestic regulatory policies tightened; individual credit events impacted and led to a deterioration in the financing environment, etc.