(Yicai) June 23 -- Beijing is set to become the first local government in China to channel funds raised through the issuance of special-purpose bonds into its government-guided investment fund, following a policy shift late last year that gave local authorities greater flexibility in how they use bond proceeds.

The capital city plans to issue CNY10 billion (USD139 million) of special bonds on June 26, which will then be invested in the municipality’s government-guided investment fund, the Beijing Municipal Bureau of Finance said recently.

This is the first time that a local government is using special-purpose bond funds to support a government-guided investment fund, Hu Hengsong, executive deputy general manager of Caida Securities, told Yicai.

This initiative will help enhance the leverage effect of fiscal funds and drive more private capital into the fund, which is designed to support the upgrading of local industries, Hu said.

However, the move is a big deviation from the norm, as since June 2019, local governments were only allowed to invest funds raised from special bonds in infrastructure projects and were not permitted to use them for equity investments such as government or industrial funds. The goal at the time was to reduce the risk from over-leveraging.

Beijing’s attempt to use special bonds to support local government investment funds is a kind of experiment, Wen Laicheng, professor at the Central University of Finance and Economics, told Yicai. At the end of last year, the central government gave local governments more flexibility to explore new ways to use bond funds. 

The Beijing Municipal Government Investment Guidance Fund backs a number of industrial funds that support the development of emerging industries such as artificial intelligence. The size of the fund had grown to CNY250 billion (USD34.8 billion) as of the beginning of the year.

The Beijing Government Fund has a high income and so a CNY10 billion (USD1.4 billion) bond is not likely to add debt stress, Hu said. Government investment in emerging industries could also have a powerful ripple effect and help steer more investment into these sectors.

The government-guided investment fund supports a wide range of projects, some of which are high-risk, early-stage projects that can easily fail, Wen said. Therefore, although it makes sense to use special bond funds to support this kind of investment, there are also real risks involved.

China’s provincial governments receive a set quota of special bonds each year. The funds raised are used to invest in projects to spur the local economy. Since the central government broadened the use of these funds, a number of provincial-level regions have come up with novel ways of using the funds. 

For example, central Hunan province said earlier this month that it will use some bond funds to repay government debts to businesses, and southeastern Zhejiang province said it plans to buy up unsold residential properties and convert them into affordable housing.

Editors: Tang Shihua, Kim Taylor