MNI INTERVIEW: China Eyes Significant Special Treasury Issuance

China will likely issue a significant volume of ultra long-term special treasury bonds with tenors of 30 years or greater to support government investment over the next few years, while the central bank aims to strengthen credit support for related projects, a prominent policy advisor told MNI in an interview, adding that the boost to fiscal revenues from additional economic growth would pay for the extra debt.

Weak demand has dragged down China's economy over the last decade and remains the country's strongest headwind, noted Zhang Liqun, senior researcher of the macroeconomic research department at the Development Research Center of the State Council. He recommended Beijing maintain a large and flexible special development treasury issuance programme to shore up private sector investment and consumption via increased public spending.

Beijing revealed plans in March to issue CNY1 trillion of ultra-long special treasury bonds this year to implement major national strategies and build up capacity in key areas, but it has not revealed issuance timelines or targeted tenors as yet.

Zhang said greater room for further policy action will exist in future. Large-scale government investment must step in as private demand contracts due to the shortage of company orders and a soft labour market, he said. “Government spending will help raise company orders, activate production and increase residents’ income, lifting the whole economy in an upward momentum,” he said.

Zhang has previously helped draft government work reports as well as China’s five-year plans. (See MNI INTERVIEW: China To Extend Debt, Reform Local Gov Tax)

The central bank will coordinate with fiscal policy and ensure lenders provide sufficient loans to those long-term projects, he added, noting this will mobilise idle funds in the banking system, and increase the effectiveness of policy easing.

NEW URBANISATION

Zhang suggested funds raised via the special treasuries should target “new-type urbanisation,” improving the life of the so called "new citizens" living and working in cities without official Hukou household registration, which excludes them from access to the majority of public welfare.

China wants to promote infrastructure, education, medicine and housing for the over 200 million new citizens, which could generate enormous investment and consumption, Zhang said, noting that authorities are developing a programme of “city groups” that will help smaller neighbours grow. (See MNI: China Seen Sustaining Fiscal Stimulus As Total Deficit Up)

China’s registered population urbanisation rate is about 47.7% at present, compared to the over 65.2% of the rate of permanent residents, Zhang said, noting this fell far behind the circa 80% urbanisation rate of some western countries. New-type and further urbanisation will gradually ease household registration controls, boost industrialisation with increased demand, and drive the economy, he continued.

DEBT RETURNS

Economists have called on the government to refrain from greater investment, pointing to the diminishing rate of return.

However, Zhang noted that the public expenditure supporting investment in infrastructure and public service facilities encourages demand, leading to more future fiscal revenue and economic growth.

China’s potential growth rate could reach over 7% y/y should the country manage its weak demand issues noted over the the last two years of its 14th five-year plan, he said, arguing that rate of growth could quadruple fiscal revenues in 20 years to CNY80 trillion.

“Considering long-term special treasuries’ maturities should be over 20 years, authorities are able to repay the debt with the rising fiscal revenue,” he continued.

Expansion of domestic demand will also solve overcapacity issues in certain sectors, without risk of generating excessive inflation, he added.

Authorities flagged domestic demand expansion during a politburo meeting in 2020. Following the pandemic, China must intensify efforts to expand domestic demand, using government investment to drive private allocations, employment and consumption, Zhang noted.