MNI: China Special Bond Sales To Pickup, Along With Liquidity

Special bond sales in China will get a bigger push in the second half of 2021 that should spur more reserve requirement ratio cuts to help absorb issuance and widen a pipeline of projects to boost the economy this year and next, policy advisors told MNI.

Sales of special bonds were already expected to accelerate from a tepid 28% of the CNY3.65 trillion quota used in the first half, with only 37% of the quota used by the first seven months of the year.

But because of an expected economic slowdown, the Ministry of Finance is expected to move to clear projects for special bond funding faster and liquidity is needed to absorb the expected bond issuance, according to Wang Jun, an academic committee member at the China Center for International Economic Exchanges (CCIE).

"Another cut to banks' reserve requirement ratio to help offset the liquidity gap during the bond sales peak is possible," said Wang.

But advisors have previously told MNI that timing liquidity with factors such as tax payments and existing bond repayment dates will play a role – as will a look at refinancing local debt and replenishing capital at smaller lenders as reported: MNI EXCLUSIVE: Second PBOC RRR Cut Possible, But Caution On Policy Levers.

LOCAL DEBT CONCERNS

China has fretted over finding projects that can make adequate returns on special bond funding, and the high-level of debts built up by local governments. China's latest Five-Year Plan, which runs through 2025, has identified priority projects, but greenlighting any workplans takes time.

"There are a lot of projects, but the key is how many of them are viable and profitable to be invested in," said Liu Xiangdong, deputy director of Economic Research at CCIEE. Liu said a targeted RRR cut is more likely this time around as monetary policy has aimed to support smaller to medium companies facing the most headwinds.

He added that Beijing will still apply strict reviews to ensure substantial work in the pipeline at the year-end and the beginning of next year when the economic slowdown is expected to bite. Liu expects growth to ease to 5.5% in Q4 as the base effect from the pandemic lockdown impact fades.

THE OFFICIAL WORD AND FLEXIBILITY

An update on the economic outlook was provided in the late-July Politburo meeting that signaled marginal easing in macro policy with a shift to prioritize stabilising growth.

In particular, the Politburo dropped the language of "using the window of opportunity with less growth pressure" and emphasized cross-cycle policy adjustments considering increased growth pressure into next year.

That seems to open a window for more attention on fiscal expansion and project funding, but there is still caution, Liu said.

Yang Xiaoyi, researcher at BRI Data, an investment advisory firm to local governments, said some funds could head to state-owned companies or local government financing vehicles to replenish capital and to improve their liquidity and help resolve local implicit debts if the annual quota is not used up solely on projects.

Yang said the window for bond sales has been extended to year-end, as the issuance usually ends in Q3. Liu expects the issuance peak could come in Q4 as many projects are still under review in Q3.

The acceleration of special bond issuance and how the proceeds are used is important because a recent resurgence of local Covid-19 cases could hit consumption and employment. A potential wider global slowdown may also dim export-led recovery hopes, Wang said.

Wang predicted fixed-asset investment could grow 3-4% in 2021, compared to 2020's 2.9%, while overall economic growth could slow below 6% in Q4.

"The (government) won't approve projects just for using up the bond sales quota," said Yang, who expects at least CNY3 trillion of special bonds would be issued this year.