MNI: China Could Offer Fewer Special Bonds Than Expected

Local special bond issuance in China may not jump as sharply as expected in the second half of this year as it becomes harder to select suitable infrastructure projects even amid differing views on the chances of an economic slowdown ahead, policy advisors told MNI.

Special bonds so far this year have been underused, with only around 28% of the target for the year accounted for by June, Finance Ministry data shows. Sales of the bonds, which are paid back by proceeds of projects they are used to fund, should peak in the third quarter, as the People's Bank of China likely increases liquidity via open market operations to help smooth the sales, but some advisors noted that it was getting harder to find viable infrastructure projects to spend on.

"The issuance of local government special bonds may end up over CNY3 trillion this year, a bit short of the CNY3.65 trillion (USD4.6 billion) quota set for 2021," said Zhang Yiqun, director of a fiscal studies institute affiliated with Jilin province's finance department.

Part of the CNY3.75 trillion raised from such bonds issued last year to help boost the pandemic-sapped economy remain unused. This year, some of the special bond quota could be directed to refinancing risky local debt, including off-balance sheet liabilities, or to replenishing capital at smaller lenders, Zhang said.

A total of about CNY1.60 trillion of refinancing bonds were issued in the first five months of this year, compared to CNY1.89 trillion in all of 2020, prompting speculation some of the funds went to paying debts which local governments had tried to keep below the radar.

MORAL HAZARD

Last year CNY200 billion of the special bond quota was also used to replenish capital at local small- and medium-sized banks, but no more such funds are likely to be dedicated to this in 2021, due to concerns over financial risk and moral hazard, said a research source who asked not to be named.

"Local governments becoming major shareholders of local banks could mean sharing more risks in bailing out the bank," the source added.

Yet, while some advisors pointed to the difficulty of utilising the full special bond quota, not all agree. Wang Jun, an academic committee member at the China Center for International Economic Exchanges, has called for accelerated fiscal spending including the full special bonds quota for infrastructure programmes.

He was more concerned about the prospects for the economy than other advisors, and said authorities should prepare for a possible steeper economic slowdown.

Consumption has not yet recovered to the pre-pandemic levels, restraining a key growth driver, said Wang.

Sporadic outbreaks of COVID-19 cases will continue to affect service consumption and income growth in the post-pandemic era, as well as diminish home-related spending as the government keeps a tight lid on real estate markets.