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Local government special bond issuance in China is likely to remain near a record in 2022 with Beijing scouring for infrastructure investments to overcome economic headwinds, policy advisors told MNI, while noting that stricter reviews on projects are needed to avoid expanded debt risks.

The foundations for issuance expected around CNY3.65 trillion was laid this week with a 50 basis point cut in the reserve requirement ratio for banks, freeing CNY1.2 trillion of long-term funds that can help fund the new special bond issuance as part of a fiscal expansion endorsed this week by China’s Politburo meeting to ensure economic growth next year.

“If China aims for a higher growth target like 5.5-6% next year, it is necessary to maintain broadly the same level of debt expansion like this year, or even allow a slightly higher quota of special bonds,” said Zhao Xijun, deputy dean of the School of Finance at Renmin University.

He added that even though GDP growth rate is no longer the only indicator to measure the economy as Beijing has shifted its focus to high-quality development, but it is still seen as necessary to have certain growth to create new jobs.

Wu Yaping, researcher at the Investment Research Institute, China Academy of Macroeconomics agreed that 5.5-6% should be the “reasonable growth zone” for 2022, which is close to the potential growth rate, and the government should avoid a sharp deceleration from 2021’s high growth of possibly about 8% in a pandemic rebound.

“It is necessary for the government to keep the continuity, stability and sustainability of its macro policy as the pandemic is still raging and maintaining the level of new special bonds is required for supporting ongoing projects,” said Wu.

China may pursue other measures to cut borrowing costs such as a cut in the loan prime rate soon, but the People’s Bank of China made it clear on Monday it will not pursue a “credit flood” to stimulate the economy.

Beijing initially offered special bonds in 2015 with a sale amount at CNY100 billion with the interest and principal to be repaid by proceeds from projects.

The bonds have now grown into an important source of funds for local governments to stimulate investment. China had allowed a record CNY3.75 trillion of new special bonds in 2020 to lift the pandemic-sapped economy and followed with another CNY3.65 trillion in 2021.


Though special bonds are not counted into the deficit-to-GDP ratio, such progressive expansion still helps push up local debt levels. By end-October, the outstanding local government debts (including general and special bonds) totaled CNY29.65 trillion, according to data by the Ministry of Finance.

The country’s annual budget showed fiscal resources for local governments totals about CNY30 trillion, meaning the overall local debt ratio is around 100%, falling into the risk warning zone between 80% to 120%. The government should be alert to this figure and strengthen project reviews to boost debt efficiency, said Zhao.

Zhang Yiqun, director of a fiscal studies institute affiliated with Jilin province's finance department noted that provincial governments are given the autonomy to allocate special bond funds to more profitable projects.

By region, Zhang believes there is room for more debts, especially in some developed regions. Wu points out that fiscal revenue will increase as GDP grows, which will keep the local debt ratio relatively stable.

Instead, Wu is more concerned about a lack of profitable projects to keep up with new bond sales after two years of a total sale amount of CNY7.4 trillion in special bonds. After years of a great project bustle, China still has a lot of infrastructure needs mainly in public services, said Wu, adding that more affordable housing is needed to offset the real estate downturn.


Though advisors agreed on keeping the special bond quota in 2022 near the 2021 level, they diverged on next year’s deficit-to-GDP ratio.

Both Zhao and Zhang believes it should be kept below this year’s 3.2%, as inflation and debt risks weigh.

“It’s even better to normalise it to the 3%-of-GDP red line,” said Zhang.

Wu argued narrowing the deficit ratio will reduce available funds for local governments, which not only affect their infrastructure investments but also impact government operations and people’s livelihood.

“Maintaining or even slightly higher than 3.2% is acceptable,” Wu added.


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