MNI: China To Advance Local Special Bonds To Boost Economy

China will bring forward part of its roughly CNY3 trillion 2024 quota for issuance of infrastructure-backed local-government “special bonds” to the beginning of next year to ensure investment retains momentum, policy advisors and market analysts told MNI.

While authorities will reveal the annual local-bond quota and debt cap during the National People’s Congress next March, the legislature’s Standing Committee discussed a bill to approve front-loading the 2024 allocation in late October. Yang Xiaoyi, senior researcher at local government investment advisory BRI Data, anticipates at least CNY1 trillion of the debt sales will be fast-tracked.

Total issuance of CNY3-3.5 trillion next year would be reasonable – compared to 2023’s CNY3.8 trillion special-bond quota – given local governments' debt payment capacity and the size of local bond markets, Yang said. She noted, however, the bonds’ effectiveness had likely peaked and local governments would direct a large part of the new quota to fund ongoing projects.

By the end of September, the balance of local government special bonds, introduced in 2015, had reached CNY23.9 trillion.

While the Central Financial Work Conference this week signalled increased scrutiny of local government finances, and called for the central government to help local governments reduce their debt burdens, a sudden reduction in the scale of special-bond issuance could undermine growth at a time of increasing economic headwinds, said Wang Jun, director at the China Chief Economist Forum and chief economist at Huatai Asset Management.

While the bonds are paid off by proceeds from completed projects they fund, years of high investment have meant that local governments have begun to struggle to spend the money they raise profitably, and authorities recently extended their use to two new areas – urban village renewal and affordable housing. Urban village renovation is unlikely to drive major investments on the scale of the shantytown renovation campaign between 2015-2017 given its restriction to “super-large and mega cities,” Yang noted.

But areas such as elderly care, childcare, healthcare and vocational training projects will receive solid demand, and help the economy transform to a more sustainable consumption- and innovation-driven growth model, said Zhu Jun, professor at Nanjing University of Finance and Economics. Zhu argued that issuance of the debt should be slightly higher than in 2023 to support the economy.

Weak consumer sentiment may mean the rebound in September retail sales to 5.5% y/y are likely not sustainable over Q4, with savings outweighing spending, Zhu said.

China’s consumer confidence index fell by 5.6 points to 109 in Q3 from Q2, though still above the breakeven 100 mark, according to data by the Beijing Municipal Bureau of Statistics.

Domestic demand remains weak, said Wang, noting that October's PMI fell into contraction territory and adding that further stimulus was needed to support the housing market.

Authorities should set next year’s deficit-to-GDP ratio at about 3.5% to target 5% GDP growth, he said, speaking after last week’s announcement of issuance of an additional CNY1 trillion in China Government Bonds, pushing 2023’s deficit to a new high of 3.8% (See: MNI: China Stimulus To Keep 2024 Growth Over 5%, Advisors Say)