(Yicai) Jan. 22 -- Against a backdrop of falling borrowing costs, Beijing slashed the amount of interest it would have paid on local government bonds by 70 percent last year as a result of repaying the debt ahead of schedule.

Last August, China’s capital city repaid CNY39 million (USD5.5 million) of special bonds that had been issued in February 2020, 17 years before they fell due, according to the budget report issued by its finance bureau. The bonds were part of a CNY8.4 billion (USD1.2 billion) tranche carrying a coupon rate of 3.42 percent.

Since then, borrowing costs have tumbled, with 20-year local government bonds sold by Beijing last June having a 2.98 percent coupon.

Lower interest rates on bonds have made it easier for local governments to make early repayments, but investors lose out, Wen Laicheng, a professor at the Central University of Finance and Economics, told Yicai. And in order to repay debt early, the issuing authority needs to be strong financially, Wen added.

Beijing’s fiscal revenue jumped 8.2 percent last year to CNY618.1 billion (USD86.4 billion), according to the budget report. That was the fastest growth and biggest haul in the past eight years.

The terms for early bond repayment are either set out in the sale document or local governments have to negotiate with investors, Wen said, adding that as commercial banks hold more than 80 percent of local government debt, it is possible to repay ahead of schedule.

It is not clear if other local governments will follow Beijing, as many regions have a big gap between their fiscal revenue and expenditure, according to Wen. Local governments need to optimize the terms and structure of their debt and control their fundraising costs, he said.

The average coupon on local government bonds was 2.9 percent in the first 11 months of last year, down substantially from 3.89 percent in 2018, according to the Ministry of Finance.

The interest paid on local government debt topped CNY1 trillion (USD139.2 billion) in 2022 for the first time, ministry figures showed. And in the first 11 months of last year, payments amounted to CNY1.14 trillion.

Editor: Kim Taylor