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Bonds

China's Finance Ministry's Plan for Local Government Special Bonds

2024-11-18

In Beijing, China on September 04, 2020, the central business district during the rush hour presented a bustling scene with buildings and vehicles. Zhang Qiao from Visual China Group and Getty Images captured this moment. State-backed The Securities Times reported on Monday that China's finance ministry is devising a strategy to front-load a portion of the 2025 local government special bonds quota. This move is aimed at fulfilling the funding requirements for significant infrastructure projects. The State Council, as China's cabinet, typically determines and distributes an advance allocation of new local government debt quotas for the following year in the fourth quarter, taking into account the economic conditions. It was stated that "At present, the Ministry of Finance is formulating an advance work plan to better ensure the funding needs of major projects in key areas and to leverage the important role of government bond funds in the economic recovery," without providing specific details. By the end of October, local governments had issued 3.9 trillion yuan ($539 billion) in new special bonds, nearly completing the debt issuance under the 2024 quota. Last week, data was released indicating that factory output growth decelerated in October. Although consumers showed signs of improvement, it was still too early to declare a turnaround in the crisis-hit property sector. This has kept alive the demand for Beijing to enhance its recent stimulus measures to revitalize the economy. Earlier this month, China unveiled a 10 trillion yuan debt package to alleviate local government financing difficulties and stabilize the flagging economic growth. As it faces new pressure following the re-election of Donald Trump as U.S. president, the central bank has also intensified policy support since late September. It has cut interest rates and injected more cash into the economy to assist in meeting the government's 2024 growth target of around 5%.

Unraveling China's Finance Ministry's Bond Move

Front-Loading of 2025 Local Government Special Bonds Quota

The finance ministry's decision to front-load part of the 2025 local government special bonds quota is a significant move. It shows their proactive approach in addressing the funding needs of major infrastructure projects. By doing so, they aim to provide a much-needed boost to the economy. This strategy allows for timely allocation of funds, ensuring that projects can proceed smoothly and contribute to the overall development. It also highlights the importance of government bond funds in driving economic recovery.

Moreover, this move reflects the government's awareness of the current economic challenges and their commitment to taking proactive measures. It demonstrates their understanding that infrastructure development plays a crucial role in stimulating economic growth. By front-loading the bonds, they are able to kick-start projects that will have a long-term positive impact on the country's development.

State Council's Role in Determining Debt Quotas

The State Council's role in determining and issuing advance allocations of new local government debt quotas is of great significance. Based on economic conditions, they make strategic decisions to ensure the proper utilization of funds. This process helps in maintaining a balanced approach to debt management and economic development. By carefully assessing the economic situation, the State Council can allocate the appropriate amount of debt quota to different regions and sectors.

It also provides a sense of stability and predictability in the financial system. Local governments can plan their projects and financing activities with more certainty, knowing the amount of debt quota they will receive. This helps in avoiding sudden shocks and ensures a more sustainable growth path. The State Council's role in this regard is crucial for the smooth functioning of the local government's debt management and economic activities.

Progress in New Special Bond Issuance

By the end of October, local governments had achieved remarkable progress in issuing new special bonds. The issuance of 3.9 trillion yuan ($539 billion) under the 2024 quota is a significant milestone. This indicates the active participation of local governments in leveraging government bond funds for infrastructure development. The timely issuance of bonds helps in meeting the funding needs of various projects and keeps the economic momentum going.

However, it is important to note that while the progress is significant, there is still room for further improvement. Continued efforts are needed to ensure that the funds are utilized efficiently and that the projects deliver the expected results. Monitoring and evaluation mechanisms should be in place to ensure the proper use of funds and to address any potential issues promptly.

Impact on Factory Output and Property Sector

The data released last week showing the slowdown in factory output growth in October raises concerns. Although consumers showed some signs of improvement, it is too early to declare a turnaround in the crisis-hit property sector. This highlights the need for continued support and stimulus measures to revive the economy.

The finance ministry's plan to front-load local government special bonds and the central bank's policy support play a crucial role in addressing these challenges. By providing additional funds and stimulating economic activities, they aim to boost factory output and revive the property sector. These measures are essential for maintaining economic stability and promoting sustainable growth.

China's Debt Package and Economic Stimulus

Earlier this month, China unveiled a 10 trillion yuan debt package, which is a significant step in addressing local government financing strains and stabilizing economic growth. This package provides a much-needed lifeline to the economy and helps in overcoming the challenges posed by various factors such as the re-election of Donald Trump as U.S. president.

The debt package is designed to inject liquidity into the economy and support infrastructure development. It also helps in reducing the financial burden on local governments and enabling them to undertake more projects. By providing a comprehensive solution, China is taking proactive measures to ensure economic stability and growth.

Investors seeking opportunities in the Muni - Bonds fund category might find American Century CA High Yield Municipals A (CAYAX) to be a compelling option. With a Zacks Mutual Fund Rank of 1 (Strong Buy), it stands out based on factors such as size, cost, and past performance. CAYAX is just one among the numerous Muni - Bonds funds available. These funds invest in debt securities issued by states and local municipalities, which are commonly used for infrastructure construction, schools, and other government-related purposes. Some securities are backed by taxes (revenue bonds), while others are known as "general obligation" and may not have a specific backing. The inherent tax benefits make these bonds highly attractive.

American Century Family and Fund History

CAYAX belongs to the American Century family based in Kansas City, MO. It made its debut in January 2003 and has accumulated approximately $48.13 million in assets as of the latest available date. The fund is currently managed by Joseph Gotelli, who has been in charge since January 2012. This long history and experienced management add to the fund's credibility.When it comes to performance, this fund shows interesting characteristics. It has a 5 - year annualized total return of 0.81% and is positioned in the middle third among its category peers. For shorter time frames, the 3 - year annualized total return of -0.9% also places it in the middle third. It's important to note that the product's returns may not fully reflect all expenses. Any unaccounted fees would lower the returns. Additionally, total returns do not include the fund's [%] sale charge. If sales charges were included, total returns would be lower.Looking at the standard deviation of returns is crucial. A lower standard deviation indicates less volatility. Over the past three years, CAYAX has a standard deviation of 9.11% compared to the category average of 13.19%. Over the past 5 years, the standard deviation is 8.41% compared to the category average of 13.67%. This makes CAYAX less volatile than its peers over the past half - decade.CAYAX also has a beta of 0.91, meaning it is less volatile than a broad market index of fixed income securities. With a positive alpha of 0.21, it performs well on a risk - adjusted basis.In terms of bond ratings, CAYAX has 22.8% in high quality bonds rated at least "AA" or higher and 22.95% in medium quality bonds with ratings of "A" to "BBB". The fund has an average quality of BBB and focuses on medium quality securities. However, it's worth noting that 48% of the bonds in this fund are not ranked, so one should approach the average quality level with some caution.

Cost Considerations

Costs play a significant role in mutual fund investing, especially in a competitive market. All else being equal, a lower cost product tends to outperform its identical counterpart. CAYAX is a load fund with an expense ratio of 0.75% compared to the category average of 0.90%. From a cost perspective, CAYAX is actually cheaper than its peers. It's essential for investors to be aware of these cost differences.Investors should also note that the minimum initial investment for the product is $2,500, and each subsequent investment needs to be at $50. Additionally, fees charged by investment advisors have not been considered. If these were included, returns would be lower.Overall, with a high Zacks Mutual Fund rank, comparable performance, better downside risk, and lower fees, American Century CA High Yield Municipals A (CAYAX) appears to be a good potential choice for investors at present.Your research on the Muni - Bonds segment doesn't have to end here. You can explore all the excellent mutual fund tools offered at www.zacks.com/funds/mutual - funds to obtain additional features and information. Whether you're a novice or an experienced investor, we have a full suite of tools on stocks to help you find the best choices for your portfolio.Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report.Get Your Free (CAYAX): Fund Analysis Report.To read this article on Zacks.com click here.Zacks Investment Research.

Alibaba Group Holding BABA is set to embark on a significant financial move by planning to issue U.S. dollars and Chinese yuan bonds. This strategic decision aims to address existing debt and provide a boost to the ongoing stock buyback initiative. The company recognizes the importance of leveraging low global interest rates to replenish its capital base and enhance shareholder value.

Benefits of Bond Issuance

Market analysts highlight that the declining interest rates in the Asia-Pacific region have made debt issuance an attractive option for companies like Alibaba. By issuing bonds, Alibaba can execute share buybacks and invest strategically without incurring high financing costs. This allows the company to optimize its capital structure and return more value to shareholders.For instance, Kenny Ng Lai-yin from Everbright Securities International told the SCMP that this environment offers a unique chance for firms to enhance capital returns through debt financing. The company's strategic push to increase buybacks reflects a broader trend among top Chinese tech firms, driven by steep declines in stock valuations.Alibaba's shares have faced significant challenges, falling approximately 70% from their peak in late 2020. Despite continued growth in sales and profits, economic weakness, domestic regulatory crackdowns, and disappointing fiscal stimulus have weighed on the stock. However, the bond issuance provides an opportunity to stabilize the company's financial position and support its share price.

Details of Bond Issuance

The exact principal amount, interest rates, and maturity terms for the bonds will be determined at the time of pricing. According to SCMP, the issuance is likely to generate up to $5 billion. The dollar-denominated bonds will have maturities of 5.5, 10.5, and 30 years, while the yuan-denominated bonds will carry tenors of 3.5, 5, 10, and 20 years. This broad range of options provides potential investors with flexibility and choice.Yields on U.S. Treasuries currently stand at around 4.31% for five-year notes, 4.44% for ten-year notes, and 3.62% for thirty-year bonds. In contrast, Chinese government bonds offer significantly lower yields, with three-year and five-year bonds yielding 1.35% and 1.7%, respectively. This disparity creates favorable conditions for Alibaba's planned bond issuance, reducing the overall cost of borrowing.

Financial Performance and Liabilities

Last week, Alibaba reported fiscal second-quarter 2024 revenue growth of 5% to $33.70 billion, beating the analyst consensus of $33.47 billion. Taobao and Tmall Group revenue grew by 1% to $14.11 billion, Alibaba International Digital Commerce Group's revenue increased by 29% to $4.51 billion, and Local Services Group revenue grew by 14% to $2.53 billion. Cainiao Smart Logistics Network Limited's revenue increased 8% to $3.51 billion, and Cloud Intelligence Group revenue grew by 7% to $4.22 billion.As of September 30, Alibaba reported total outstanding liabilities of 202.2 billion yuan ($27.9 billion) in bank loans and bonds, marking an 18% increase since March. The company raised $5.5 billion in May through a convertible bond issue. The current bond offering aligns with Alibaba's aggressive stock repurchase program, initiated during the pandemic in 2020.

Investor Actions and Market Outlook

Michael Burry's fund increased its stakes in Alibaba, JD.com Inc., and Baidu Inc., making Chinese tech its largest holdings. Despite boosting exposure, Burry hedged risks by purchasing put options, signaling caution on potential market volatility.Price Action shows that BABA stock is up 0.42% at $88.96 premarket at the last check on Monday. This indicates a positive sentiment in the market towards Alibaba's financial moves and future prospects.In conclusion, Alibaba's bond issuance plan is a crucial step in its journey to strengthen its financial position and enhance shareholder value. By leveraging the favorable market conditions and optimizing its capital structure, the company aims to navigate through the challenges and continue its growth trajectory.