MNI EXCLUSIVE: Special China Debt May Fund Low-Return Projects

--Special China Treasury Bonds May Boost Low-Return Regional Infrastructure

--Local Governments Not Keen On Using Funds For Banks, Advisors Say

     BEIJING (MNI) - A CNY1 trillion sale of special Chinese Treasury bonds

could provide a boost to lower-returning infrastructure such as health, policy

advisors said, noting that the funds will be transferred on favourable terms to

regional governments whose participation in other initiatives aimed at financing

such spending has sometimes been lower than hoped for.

     A significant portion of the CNY1 trillion would go towards health

spending, said Zhang Yiqun, director of a fiscal studies institute affiliated

with Jilin province's finance department. The central government will pay the

interest on the Treasury bonds, as well as CNY300 billion of the principal,

increasing incentives to take on spending which local administrations, already

heavily-indebted, might otherwise have shied away from.

     Boosting public health spending would also bolster market confidence in

recovery from the coronavirus epidemic, noted Han Yongwen, a delegate to the

National People's Congress.

     The Treasury bonds will bear maturities for as much as 10 years, which is

manageable for local governments, said Zhang. Han, who is also vice chairman of

the China Center for International Economic Exchanges, said maturities should be

as long as possible, even more than 10 years, to ease repayment pressures.

     China's post-Covid-19 stimulus also includes a 74% increase in quotas for

issuance of local government special bonds, to CNY3.75 trillion. This type of

debt is supposed be repaid by revenues from projects it funds, and, in practice,

local officials have sometimes struggled to find economically viable ways of

spending it. The bigger quota will probably prod local governments into

considering more lower-return ventures, as well as new areas including 5G base

stations, said Zhang. Yu Miaojie, a deputy dean at the National School of

Development at Peking University, said they should mainly support high-tech and

large-scale infrastructure as well as urban construction.

     --BANK RECAPITALISATION

     The first CNY100 billion tranche of the special Treasury bonds, which do

not figure in headline government deficit calculations because they are meant to

be used as capital to produce profitable or liquid assets, was announced on June

15. Officials at the People's Bank of China and the national bank regulator have

also told MNI that local governments could use part of the special Treasury

funds to set up special funding vehicles to recapitalise local banks, but Zhang

and Han were doubtful that regional officials would want to use the money in

this way.

     On top of the special Treasuries, the national government will also

transfer an additional CNY1 trillion from its central budget to local

governments to safeguard jobs and support regional economies, according to a

working report presented by Premier Li Keqiang in late May. This will be funded

by an equivalent increase in the national budget deficit, to CNY3.76 trillion.

     Some of the funds from the Treasuries could also be used for local current

spending, Zhang said. The central government's deficit ceiling of "above 3.6%"

could mean that its spending turns out to be higher than currently planned, he

said, anticipating that the deficit might rise as high as 4%. Han, though, said

any leeway in the fiscal target was probably meant to take account of the

possibility that growth might be lower than expected, rather than to allow for

higher spending.

     The government plans to establish a special transfer payment mechanism

allowing the CNY2 trillion in new funds to be distributed as quickly as

possible, and to ensure local authorities do not sit on the money. Funds could

be disbursed directly to counties, with provincial governments taking only a

modest role in the administration of the scheme, speeding up the process, Zhang

and Han said.

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

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