MNI EXCLUSIVE: China Gov't, Local Gov'ts To Boost Bond Sales

By Wanxia Lin

     BEIJING (MNI) - China could issue up to CNY1 trillion of special CGB China

Government Bonds or expand issuance of infrastructure-backed special-purpose

debt by local governments to fund increased fiscal spending to counter the

economic impact of the coronavirus outbreak, government advisors told MNI.

     "However it's labelled, the government will almost certainly boost fiscal

funding to cover extra-budgetary spending on epidemic control," said Liu

Xiangdong, deputy director of economic research at the China Center for

International Economic Exchanges, adding that the authorities will be keen for

the target of doubling GDP since 2010 to be met.

     "If the epidemic can be controlled by the end of March, CNY1 trillion of

special CGBs should be enough given the multiplier effect," said Liu, adding

that the epidemic has dented the economy by around CNY1 trillion so far, and

that Q1 growth could fall to 5.3-5.6%. If quarantines continue in force into the

second quarter outside the epidemic's epicentre in Hubei province, growth could

slip to 4.5-5%, Liu added. The advisor said he had upgraded Q1 forecasts as

employees return to workplaces and factories.

     On Sunday, President Xi Jinping pledged to make fiscal policy "more

effective", and to expand local government special bond issuance, which do not

appear in headline central government accounts. Nor do special CGB issuances,

which in 1998 and 2007 were accounted for in budgets for government managed

funds instead of being included in the fiscal deficit.

     But, as debt increases, and GDP slows, China's leverage will rise. Liu

thinks the central government still has room for more debt, with its outstanding

bonds totaling CNY16.7 trillion by the end of 2019, representing a leverage

ratio of 16.8%, according to a quarterly report by the National Institution for

Finance & Development. The overall ratio for all of China's government was

38.3%.

     --ADMINISTRATIVE OBSTACLE

     Any issuance of special CGBs should be capped below CNY1 trillion, given

that the epidemic should be short-lived, said Yu Miaojie, deputy dean of the

National School of Development at Peking University, who advises several

government departments. Long-duration CGBs could support infrastructure

investment, said Yu, who added that the central government could sustainably

expand its fiscal deficit to 4% of GDP.

     Yuan denominated CGBs would mainly be issued via China Development Bank,

and Agricultural Development Bank of China, said Yu. Exim Bank of China may also

participate in the sale, making some issuance of dollar bonds possible, he said.

     But CGB sales face an administrative obstacle, as they would require the

approval of the National People's Congress, originally due to sit in March and

now suspended due to the virus. This might make issuance of local government

special purpose bonds a more practical option, Yu said.

     In addition, advisors remain divided over potential CGB issuance to fund

what they view as a short-term economic problem, said Zhang Yiqun, director of a

fiscal studies institute affiliated with the Jilin province finance department.

     Local government bond issuance will spike in March as the economy,

including local bureaucracies, returns to more normal work patterns, said Zhang.

If the central government front-loads special bond quotas around that time, it

could signal more aggressive debt expansion this year, he said. So far, quotas

for CNY1.29 trillion in issuance of local government special bonds have been

granted ahead of the National People's Congress, when the annual quota is

expected to be released.

     The government could expand quotas above CNY3 trillion, from CNY2.15

trillion in 2019, Zhang said, although he noted the lack of viable

infrastructure projects which could feasibly provide the necessary revenues

needed to pay back the debt. One area for investment could be public health,

whose shortfalls have been exposed during the epidemic, he added, although the

economic impact of such projects is lower than that from construction of

railways or highways.

     As government-led investment rises, and local government financing vehicles

take advantage of historically low yields, there is a danger that implicit debt

grows, with the central government regarded by investors as likely to foot the

bill if bonds go bad, Zhang warned.

--MNI Beijing Bureau; +86 (10) 8532-5998; email: wanxia.lin@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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