MNI EXCLUSIVE: China Local Government Bonds To Boost Growth

By Iris Ouyang

     BEIJING (MNI) - China is likely to boost quotas for local government

issuance of infrastructure-backed bonds this year, policy advisors told MNI,

with some also calling for the national fiscal deficit to be expanded to more

than 3% of GDP to bolster a slowing economy.

     The authorities could grant local governments permission to issue more than

CNY2 trillion in special purpose bonds for new infrastructure financing, Zhao

Quanhou, from the Chinese Academy of Fiscal Sciences, and Lian Ping, economist

of China Finance 40 Forum and chief economist at Bank of Communications, told

MNI. A third advisor, Xu Sheng, director of finance and tax at the Chinese

Academy of Macroeconomic Research, said the authorities might only authorise

CNY1 trillion in fresh financing, but that as much as CNY3 trillion would be "a

necessary measure if the economy continues to slow to a bottom line of around

6.3%."

     Last year, the quota for newly-added special bond issuance was CNY1.35

trillion. The securities have become key for funding infrastructure after

crackdowns on wealth management businesses and off-balance sheet vehicles

crimped local governments' access to finance. Total issuance of special purpose

bonds, including those used to refinance other debt, totalled CNY1.95 trillion

last year.

     "The scale of special bond issues will expand," Xu told MNI. "And approval

criteria could be relaxed for some projects, such as those which are urgent but

whose returns can't completely cover costs."

     --FISCAL DEFICIT BOOST

     The government should also embark on fiscal expansion after growth fell to

the lowest level since the financial crisis in the fourth quarter, Xu said,

calling for the national budget deficit to rise from 2018's 2.6% of GDP to more

than the 3% level which officials, concerned about maintaining investor

confidence, regard as a ceiling. The government could also accelerate its own

spending on local infrastructure, although he noted there was probably little

scope to expand beyond a CNY600-700 billion a year budget allocation.

     "It's technically feasible (to increase the fiscal deficit) as there's not

much room for monetary policy easing. But the efficiency of fiscal policy is

declining," Xu told MNI, adding that tackling trade frictions with the U.S.

would be a more practical way to offset economic headwinds.

     Another advisor, Zhang Bin, from the Institute of World Economics and

Politics under the Chinese Academy of Social Sciences, called, like Xu, for the

fiscal deficit to be raised to over 3% of GDP, although Zhao and Lian said that

that may not be necessary.

     "It's not that the fiscal deficit target can't be changed during the year,"

Zhao added. "In 1998 we adjusted the deficit in the middle of the year ... If

trade talks don't produce a favourable result and the economy doesn't gain

enough momentum domestically, we could adjust it."

     In addition to allowing more issuance of special bonds to fund

infrastructure spending, the national government could also pay for projects by

increasing fees for some related public services, such as water, energy and

electricity, Zhao said.

     The Chinese government has increased spending since the second half of last

year to boost infrastructure investment and buoy the economy in the midst of the

trade war with the U.S. The world's second-largest economy grew by 6.4% in the

fourth quarter, the slowest pace since the 2009 financial crisis, according to

statistics bureau data last week.

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

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

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