MNI EXCLUSIVE: Slow Growth May Prompt More China Special Bonds

By Wanxia Lin

     BEIJING (MNI) - China could allow local governments to issue more

infrastructure-backed "special bonds" in the second half of 2019, should

pre-existing stimulus measures fail to buoy growth, although some senior

policymakers are concerned about the fiscal risks of growing debt, government

advisors told MNI.

     Beijing earlier this year authorized an annual quota of CNY2.15 trillion of

special bonds -- which are repaid by returns on projects they fund and do not

appear in headline central government accounts. The slowing economy, though, may

prompt officials to consider allowing local administrations to tap into their

unused allowances for issuance of the securities from previous years, said Zhang

Yiqun, director of an institute of fiscal studies affiliated with the finance

department of Jilin province, in Northeast China.

     "The planned CNY2.15 trillion of special bonds for this year, which is

CNY800 billion more than that in 2018, is not enough to prop up annual GDP

growth above 6%," said Zhang, adding that officials are counting on a recovery

in investment to meet 2019's growth target of 6-6.5%, and that otherwise the

rate of expansion would decelerate further from Q2's 6.2%, already the lowest in

at least 27 years.

     --AUGUST BOOST

     While recent cuts in taxes and fees may yet prove to have sufficiently

buoyed the economy to make additional special bonds unnecessary, authorisation

for more issuance could come as soon as in August, when the Standing Committee

of the National People's Congress is set to examine and approve local

governments' final accounts in 2018, Zhang said.

     Bian Yongzu, researcher at Chongyang Institute for Financial Studies at

Renmin University of China, a high-level think tank, noted that while the

government is targeting issuance of CNY3.08 trillion of new local government

bonds, including CNY2.15 trillion of special bonds, before September, raising

the quota may depend on the performance of the economy in July and August. Any

such expansion would be unlikely to use up all of the outstanding balance of

previous years' issuance limits, totalling CNY2.5 trillion, he added.

     Some top policymakers remain wary of the risks of additional debt issuance,

Zhang noted, which may limit any addition to the quota to CNY1-1.5 trillion,

despite potential market appetite for up to CNY2.5 trillion more in special

bonds.

     While these securities would not add directly to the government's fiscal

deficit -- which officials aim to cap at around 3% of gross domestic product

this year -- Zhang pointed out that, in practice, provinces could turn to local

government financing vehicles to run special-bond-driven projects, which would

eventually add to implicit local debt.

     --INVESTMENT GROWTH

     Expanding special bond issuance by CNY1-1.5 trillion could push up

fixed-asset investment growth to reach 7-8% y/y by the end of the year, from

5.8% in H1, Zhang said. Infrastructure investment could rebound to about 6% y/y,

from H1's 4.1%.

     In addition, a recent move by Beijing to allow local governments to use

proceeds from special bonds as capital for qualified major investment projects

could leverage a further CNY3 trillion, according to Zhang's calculations.

     Whether there are sufficient profitable infrastructure projects available

to absorb all of the special bond funding may be another matter.

     While Bian said there was still room for investment in the 5G sector and in

rural areas, Zhang was more skeptical.

     "Some projects have been halted, due to factors like land or environmental

protection issues, leaving funds unused or embezzled," said Zhang, adding that

the repayment pressures have added to local governments' burden. 

     At the same time, the central government has had to increase fiscal

transfers to local governments, mainly in Middle and Western China, in order to

safeguard people's basic livelihood, ensure payment of civil servants' salaries,

and maintain local government operation, he said, confirming a market rumour.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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