MNI EXCLUSIVE: China May Trim Bond Quota To Cut Debt: Advisors

China may cap next year's quota for special local government bonds at current levels or even trim it due to the limited availability of viable infrastructure projects and the push to withdraw fiscal stimulus and check debt risks in a strengthening economy, policy advisors told MNI.

After a decade of aggressive infrastructure expansion, local authorities are running out of public projects such as toll roads, bridges and ports that are funded by these special bonds with repayments linked to the project's revenue. While policy support is shifting to technology infrastructure like 5G base stations and upgrades to city telecommunication networks, the scale of these initiatives is much smaller, said Wang Jun, an academic committee member at the China Center for International Economic Exchanges.

"The priority next year is to stabilise or moderately lower government leverage," said Wang who is also chief economist at Zhongyuan Bank. According to some advisors, GDP is likely to expand as much as 8% next year, which will create room for the government to exit some stimulus measures.

FIVE-YEAR PLAN

Beijing increased this year's quota for local government bond sales by 74% to CNY3.75 trillion to boost infrastructure investment and revive the pandemic hit economy. Bonds worth CNY3.57 trillion have been issued so far, according to data provider Wind - the rest will be used to replenish the capital of medium- and small banks as announced earlier.

More long-term bonds with a maturity of over 15 to 30 years were issued to help ease repayment pressures and lower financial costs, said Zhang Yiqun, director of a fiscal studies institute affiliated with Jilin province's finance department. He expects a moderate reduction in next year's quota for special local government bonds as ongoing projects will continue to require support.

Liu Xiangdong, deputy director of Economic Research at the CCIEE, expects next year's bond quota to be set at CNY3 trillion. He thinks Beijing will kick off some major long-term projects to mark the start of the Five-Year Plan ending 2025, and that this will create opportunity for local governments to participate in supporting projects.

PPP PROJECTS

The shortage of major infrastructure projects has raised the proposal that local governments use part of the special bonds to fund Public-Private Partnership projects.

The Ministry of Finance has pledged to study the idea further but Wang thinks Beijing is unlikely to relent given its wariness about leverage and financial risks. "Many PPP projects lack clear returns…Even those with sufficient project capital will be a challenge for local governments as their income is hardly enough to cover general expenditure and subsequent spending on ongoing projects will add to their burden, he said.

Any relaxation will be targeted, according to Zhang. "For example, water conservancy projects which can charge farmers, residents and factories a higher price for improved water supply may be suitable targets for funding by special bonds in future," he said.