Shanghai has launched public bidding for 7.1 billion yuan’s worth of local government bonds. Tuesday’s launch was the first time a local Chinese government was allowed to issue bonds in more than two decades.

The city offered two bonds. The three-year maturity issue had a total value of 3.6 billion yuan, and the five-year bonds added up to 3.5 billion yuan. The interest rate for the three-year bond is 3.1 percent, and it was over-subscribed 3.5 times.

The five-year bonds carry an interest rate of 3.3 percent; they were over-subscribed 3.1 times. The Development Bank of China, the Bank of Communications, and the Bank of Shanghai underwrote the issue, which was available only to institutional investors. Analysts point out that despite their relatively low return, the bonds were obviously popular.

Qian Qimin, associate director of Market Research Dept. SWS Research, said, “The one-year bank deposit interest rate is now is 3.5 percent. Longer-term investments should command a higher rate, but we see the interest rate even for these five-year bonds was 3.3 percent. Still, the over-subscription rate this time was lower than that for the central government’s bond issues. That means more investors are interested in the local government bonds.”

Municipal authorities have been barred from borrowing directly from markets for the past two decades. And, this is the first time that local governments in China are being allowed to issue bonds to manage local finances. However, some argue that it will still be difficult for investors to manage their risks with these bonds.

Liu Shangxi, vice director of Fiscal Science Research Institute, Ministry of Finance, said, “The local government has to be fully transparent, reveal its income, expenses, balance sheet and everything to the public before the market can ensure the borrowing remains under control. Without these conditions it will be difficult for the local government bond market to develop further.”

Income from Shanghai’s bonds will go to pay for building affordable housing and infrastructure projects. The Shanghai sale will be followed by similar ones in the southern province of Guangdong on Friday, the eastern province of Zhejiang next Monday and the industrial town of Shenzhen before long.