Chengtou Bond

Chengtou bond, or urban construction development bond, is one of several forms of financing infrastructure in China, falling under the broad category of local government or subsovereign debt compared to sovereign debt such as centrally issued Chinese government bonds.

Debts where the issuer is directly from the municipality, as well as loans where the borrower is directly from the local municipality, are forms of public debt and face a number of budgetary constraints, while "Chengtou" bonds are:

1) formally extrabudgetary obligations;
2) issued not on behalf of the municipality, but, as a rule, through a combination of issuers with the participation of SPV;
3) considered as risky instruments, since the local entity can use the future flow of payments from the sale of such debt as collateral, as well as its own “good” name, as if being a kind of “guarantor”, occupy a confident, average position in terms of risk level between state and corporate bonds;
3) currently gaining a lot of popularity among retail investors and already stand out as a separate asset class;
4) play a strategic role in capitalizing and brokering infrastructure investment in China and are mainly designed for long-term positive effects.

Main advantages of Chengtou bonds:
1) are typically built into the project or "locality" and serve as a key link between financial capital and the real economy served by the infrastructure;
2) have a higher yield than Chinese government bonds;
3) they have a “social” positive effect, because, on the one hand, funds from Chengtou can be used to create social housing, on the other hand, they can create jobs in such “projects”.

Main disadvantages of Chengtou bonds:
1) not available to a wide range of investors and often more than 50% of the debt is held by commercial banks;
2) are a frequent subject of debt restructuring and conversion, due to the low profitability of project enterprises, low coverage, as well as a long period until a stable cash flow is received from the project being implemented;
3) do not burden the public entity with a legal obligation that clearly states liability for non-payment.
Examples:
Taian City Development and Investment, 4.5% 7mar2022, USD
Nanjing Jiangning Economic and Technological Development Group Corporation, USD