MNI EXCLUSIVE: China To Boost "Special Bonds", Infrastructure

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

infrastructure-backed "special bonds" in 2020 in a bid to boost investment

activity, on top of bringing forward announcements of details of some of next

year's issuance to speed up the debt sale process, government advisors told MNI.

     "The debt quota for local governments, particularly their special bonds, is

likely to be bigger next year than in 2019," said Zhao Quanhou, director of the

financial research centre at the Chinese Academy of Fiscal Sciences (CAFS) under

the Ministry of Finance.

     Special bonds, mainly aimed at infrastructure investment and paid back from

returns on the projects they fund rather than from fiscal revenue, are a major

source of funding for local governments. This year's issuance quota for the

instruments, which are not included in China's headline fiscal balance, is

CNY2.15 trillion, up from CNY400 billion in 2016.

     Just over half of the takings from H1's total CNY2.18 trillion of local

government bond issuance, including special bonds, was directed at

already-ongoing infrastructure projects, with "the clear intention of

stabilising investment," Shi Yinghua, director of the Macroeconomic Research

Centre at CAFS, told MNI.

     The State Council has said all 2019 special bond issuance should be

completed by the end of September, after which details of 2020's sales will

begin to be announced. Normally, the year's special bond plans only begin to be

made public by around March, meaning that the bonds are not actually sold until

April or later. Announcing the details earlier could mean 2020's sales begin to

take place in January, Zhao explained, adding that this front-loading of the

issuance plans will not exceed 60% of the total quotas.

     But, even as the government plans to boost special bond issuance, some

officials doubt its effectiveness. One source familiar with the matter told MNI

that tens of billions of yuan of 2019's special bond issuance quota was still

unused, due to a shortage of projects able to generate the revenues necessary to

repay the bonds, and that the central government had been forced to take some

issuance permits back for redistribution to areas better able to put them to

use.

     China wants to prioritise infrastructure spending as the economy runs into

headwinds.

     "Although we hope consumption will play a major role, it's going to be hard

unless incomes grow. But the government has control over the pace of

investment," Zhao said.

     --FEWER PROJECTS AVAILABLE

     But infrastructure investment increased by only 4.2% from January to August

compared to the first eight months of 2018, compared with peak growth of 27.3%

in Q1 2017 versus Jan-March 2016.

     With so much infrastructure spending having already taken place, the scope

for pursuing economically viable projects is reducing, according to Shi.

     Zhao said infrastructure development had also been held back by the

diversion of government spending towards land development, including rebuilding

shanty towns.

     Although special bonds aren't included in overall fiscal deficit numbers,

they do count as government debt, increasing total borrowing. China's public

debt-to-GDP ratio, including implicit debt, stood at 90% in Q1, data from the

Chinese Academy of Social Sciences shows. According to the CASS, the local

governments' implicit debt could have been CNY30-50 trillion by the end of 2018.

     Authorities may be obliged to transfer some revenue-generating assets to

local government funding vehicles to enable the repayment of these liabilities,

Zhao said.

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

[TOPICS: M$A$$$,M$Q$$$,MI$$$$,MT$$$$,MX$$$$,MGQ$$$]