REGULATORS have cut the premium that local governments must pay to issue debt, sources with direct knowledge of the matter said yesterday, lowering their borrowing costs as China hopes to kick start investments and shore up growth.

The change comes after overwhelming demand saw recent local government bond issues massively oversubscribed, underscoring both their distorted pricing and the market’s appetite for high-quality debt.

The sources said local governments would be able to issue bonds at a minimum spread of between 25 and 40 basis points over central government bonds of the same maturity. Previously, local governments were required to issue bonds with a minimum spread of 40 basis points over equivalent treasury bonds.

Xinjiang in northwestern China on Jan. 21 issued the first local government bonds of 2019, kicking off total local government bond issuance of 129.6 billion yuan (US$19.22 billion) last week, according to calculations. A further 288.4 billion yuan worth of local government bonds are due to be issued this week.

The record pace of issuance of normal and special purpose bonds means local governments will in just two weeks use up 30 percent of the total 2019 quota for new local government bond issuance approved by the State Council late last year.

China has encouraged local governments to issue bonds in the face of a slowdown in infrastructure investment.

Analysts expect China to let local governments issue 2 trillion yuan in special purpose bonds this year, up from 1.35 trillion yuan last year. Special purpose bonds are excluded from the official budget.(SD-Agencies)