China's Cabinet Issues CNY1.39 Trillion Local Government Debt Quota Early
Chen Yikan
/SOURCE : yicai
China's Cabinet Issues CNY1.39 Trillion Local Government Debt Quota Early

(Yicai Global) Jan. 3 -- China will add a total CNY1.39 trillion (USD202.3 billion) of local government debt this year, according to an early release of plans to help authorities hedge against economic fluctuations and ease the pressure on debt servicing.

The headline figure includes CNY580 billion (USD84.4 billion) in local government bonds, used for non-profit public welfare projects and repaying principal and interest from general public budget income, and CNY810 billion in special local government bonds, used for public welfare projects that generate income and are repaid with government funds and income from the projects.

The debt quota has normally been released around May, but the Standing Committee of the National People's Congress authorized the State Council, the country's cabinet, to publish plans earlier this year and in coming years before the NPC officially approves the figures in March. The quota includes general and special bonds that may not exceed 60 percent of the annual total.

Local governments used to issue bonds in the second half of the year for institutional reasons, but this caused a lack of funding in the first half and inevitably sapped the effect of the new bonds on spurring economic growth, insiders told Yicai Global.

"The newly-added debt quota used to be allocated to the local provinces and approved by provincial people's congresses after being finalized by the National People's Congress in March," said Prof. Zheng Chunrong with Shanghai University of Finance and Economics. "The actual bond issuance will wait until May or June after the quotas are approved by lower level people's congresses in the cities and counties."

May Bonds

Last year, local governments issued no new bonds from January to April, with billions of yuan in new bonds only issued in May, while CNY2 trillion was mostly released between June and October.

The delay of issuance not only impairs the bonds' efficiency and macro-regulatory function, but also generates large fluctuations in the basic asset supply in the bond market, adding pressure on interest rate pricing, investment liquidity and position management, and reducing the issuance and trading of other basic assets of the bond market, especially those of private enterprises, Prof. Mao Jie from Beijing's University of International Business and Economics told Yicai Global.

The earlier-released quota allows local governments to issue bonds to handle the economic situation in the first half of the year and repay older bonds with newer ones as soon as possible to ease repayment pressure, which suggests a positive fiscal policy, said Dr. Qiao Baoyun, dean of the China Academy of Public Finance and Public Policy at the Central University of Finance and Economics in Beijing. 

This policy is expected to continue in the coming years and will become a long-term system after improvement, Qiao added.

Topping a Trillion

The scale of special bonds funded partly by certain profitable projects has grown rapidly in recent years as against general ones. The quota of local government special bonds was CNY100 billion in 2015, jumping to CNY400 billion in 2016, doubling to CNY800 billion in 2017 and climbing to CNY1.35 trillion last year, cresting the CNY1 trillion mark for the first time, data from the Ministry of Finance show.

Many insiders expect that the quota will even pass CNY2 trillion this year. For example, Haitong Securities projects it at between CNY2.15 trillion and CNY2.35 trillion. "It's too early to say, but it is possible it will top CNY2 trillion," Qiao said.

The specific size of local special bonds this year will be disclosed in the government work report to the National People's Congress in March, and finalized after consideration by the congress, per protocol.

"It is reasonable to greatly boost the scale of local special bonds, which depends on market demand and mostly market behavior. The bond market needs a stable fixed income variety, and special bonds are very attractive in this sense," Qiao told Yicai Global.

All new local government special bonds successfully issued last year, and the general bond issuance rate was 3.89 percent in the first 11 months while that of special bonds was 3.9 percent, per Ministry of Finance data.

Editor: Ben Armour

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Keywords: Debt Limit