MNI: China To Fund Infrastructure Drive Via Special Bond Push

China will rely on project-backed special bonds to power an infrastructure spending drive at the heart of this year’s growth plans, despite concerns both about adding to local governments’ already high debt loads and a lack of economically viable projects to invest in, policy advisors told MNI.

Special bond funding provided for infrastructure could rise by as much as CNY1.3-2 trillion this year as the government pushes to sustain economic momentum, according to Lian Ping, chief economist at Zhixin Investment Research Institute. Funds from special bonds, which are repaid from project revenues, tend to be matched by up to four times their amount in additional finance, from bank loans, private participation and direct government spending, he said, pointing to a likely cut in banks’ reserve requirement ratios by the People’s Bank of China.

Total available special bond funding for 2022 may reach almost CNY5 trillion, Lian said. This includes a likely unchanged government-authorised issuance quota of CNY3.65 trillion as well as another CNY1.2 trillion of funds raised in 2021 but still unspent, either because of a lack of suitable projects or because the bonds were issued late in the year.

Detailed figures are set to be released on March 5 during the National People’s Congress, a key annual policy-setting meeting.

MORE MONEY, EASIER POLICY

The drive to boost infrastructure comes as authorities seek to boost the total flow of credit to the economy, looking through previous concerns about excessive borrowing to power this year’s growth. (See: MNI: China's Total Social Financing To Grow Faster In 2022.)

Even as it prioritises spending, the government will continue to discourage the use of off-balance-sheet local government financing vehicles, which have provided about 40% of the funds for infrastructure investment in the recent past, and raised particular concerns about unsustainable leverage, said a researcher at a government advisory think tank who asked not to be named. Overall easier monetary conditions should provide safer sources of financing, the source continued.

This year’s central government budget deficit may also be set at around the same level as last year’s 3.2% of GDP, as major building projects kick off for the 14th Five-Year Plan that started in 2021, said Liu Xiangdong, deputy director of Economic Research at the China Center for International Economic Exchanges. A looser credit environment will help to fill funding gaps for infrastructure projects, he said, pointing to record high aggregate finance in January totaling CNY6.17 trillion.

VIABLE PROJECTS

Amid a scarcity of eligible projects, the National Development and Reform Commission has asked local governments to submit more city pipeline and water conservation plans.

“It’s to ensure there are new projects kicking off every quarter, but the current local project reserves are not enough,” said Liu.

The central government may also allow special bonds to fund projects outside of the nine areas previously defined, Liu said. He thinks affordable housing and public technology projects could be designed to meet special bonds’ requirement for funding self-sustaining projects.

“Optimistically, [growth in] infrastructure investment may rebound to around 5% from 0.4% in 2021,” said Liu, “Not to hold back the overall economic growth that should stand above 5% this year.”

But the unnamed researcher expects a more modest 2-3% infrastructure investment growth as major projects like highways have reached a saturation point and smaller technology-based infrastructure like data centers cannot significantly fill the gap to bring a big economic boost, the source said.