MNI INTERVIEW: China Local Debt Size Should Support Projects

China should maintain the scale of local government special bond issues around last year's level as a buffer against lingering economic uncertainties and to support projects affected by the pandemic even as it withdraws some other stimulus measures such as special treasury bonds, a special researcher to the State Council told MNI.

With the domestic economy set to grow an estimated 11% this quarter expectations are that Beijing will continue to contain debt and reduce the quota for special local government bonds that are used to finance infrastructure projects.

However, Han Yongwen, who is also a vice-chairman of the China Center for Internal Economic Exchanges, said a large quota reduction is not advisable since many projects were delayed by the Covid-19 outbreak and would require continuous funding support. He also said many new projects would start this year.

"China should keep this year's quota of local government special bonds issuance around 2020's level of CNY3.75 trillion," said Han. Speaking to concerns that the funds raised through these bonds was not well used last year, Han, who used to be the secretary-general of the National Development and Reform Commission as well as the vice governor of Hunan province, said they must be invested only in projects with assured returns and suggested lengthening their maturity to ease the pressure from debt roll-overs.

UNCERTAINTIES

The economic recovery is not solid with consumption lagging and the possibility that the continuing global virus outbreak might disrupt exports, he said. "At such an unusual time, China should tolerate some debt expansion and maintain a certain intensity of fiscal spending," Han said.

Fiscal revenue fell 3.9% y/y to CNY18.29 trillion in 2020 amid the pandemic but local governments have continued to shoulder much of the responsibility for helping companies and boosting investment. "Keeping the scale of special government bonds is necessary to ease their burden," said Han.

There may be delayed impact from last year's increased investment in response to the virus as many projects didn't kick off until August and fixed asset investment could grow 6-7% y/y this year, lifting annual GDP growth to around 7%, Han said. Fixed-asset investment grew just 2.9% y/y in 2020.

Nevertheless, some stimulus should be gradually withdrawn to prevent risks as the economy has been recovering at a steady pace, he said. GDP grew 2.3% in 2020, while Q4 saw 6.5% growth. Growth this quarter could receive an additional boost from the low base. Han expects a double-digit expansion in GDP for the January-March period.

FISCAL DEFICIT

Some temporary policies like the issuance of CNY1 trillion special treasury bonds last year can be withdrawn once the sporadic outbreak of the epidemic is under control, said Han. "The budget deficit-to-GDP ratio should fall from above 3.6% last year to 3%, a red line not to be crossed as deficits higher than that will be difficult to sustain long-term," he said.

Han expects the lower deficit rate to limit room for tax and fee cuts and existing tax-related policies to continue unchanged.

Still, last year's support for small and medium enterprises should continue and become "more targeted," he said. "The financing needs of almost 70% of these companies is not met," he said. Supporting policies, such as the government's loan guarantees that ease borrowing, should be refined to bailout more SMEs in the consumer goods and service sector, which have been hard hit by the pandemic, Han said.