China’s 2023 Special Bond Quota May Top This Year’s Record Amount, Analysts Say
Chen Yikan
DATE:  Nov 03 2022
/ SOURCE:  Yicai
China’s 2023 Special Bond Quota May Top This Year’s Record Amount, Analysts Say China’s 2023 Special Bond Quota May Top This Year’s Record Amount, Analysts Say

(Yicai Global) Nov. 3 -- Chinese local governments’ issuance of new special bonds this year is set to reach an all-time high of over CNY4 trillion (USD547.7 billion) this month. And next year’s quota will not be less and could be released early to boost economic growth, analysts said.

Some CNY3.9 trillion (USD532.9 billion) in newly-issued special bonds was issued in the first 10 months and another CNY60 billion (USD8.2 billion) is due to be released in November, meaning that the year’s quota of CNY4.15 trillion will soon be fulfilled.

Next year’s quota for new special bonds will be almost the same as this year or slightly higher, said Feng Lin, senior analyst at Golden Credit Rating International. This is partly because there will still be downward economic pressure in the first half next year, which will require funds from special bonds to help spur investment in infrastructure and stabilize economic growth.

The biggest feature of this year’s special bonds is the rate at which they are being released and utilized, said Feng. This year’s issuance is even faster than in 2020, when the economy was greatly impacted by the pandemic, so as to help stabilize the macroeconomy as soon as possible.

Usually, the finance ministry allocates the quota every March after it is approved by the National People’s Congress. The schedule means that local government bonds tend to be issued in the second half of the year, affecting financing efficiency. Since 2018, in order to speed up their disbursement in the economy, the congress has been approving up to 60 percent of the following year’s quota ahead of time.

Last December, the Ministry of Finance made an early move to issue a special bond quota of CNY1.46 trillion (USD200 billion) for this year, accounting for 36 percent of the annual total. The huge investment went to municipalities, transportation and social programs, and played an important role in macroeconomic balancing.

Part of next year’s quota, which should be announced before the end of the year, is likely to exceed CNY1 trillion as well, the chief economist at Yuekai Securities said.

Special bonds can be used by local governments as capital to fund major investment projects such as railways, highways and gas and power supplies. This year, the fields of new infrastructure and new energy were added.

Special bonds were first introduced in 2015 as an important tool for governments to boost investment and at the time only amounted to hundreds of billions of Chinese yuan, equivalent to tens of billions of US dollars. But since the Covid-19 pandemic started, annual disbursements have reached more than CNY3 trillion and are set to top CNY4 trillion this year.

People need to be aware of the risks brought about by a surge in special bond issuance, said Wen Laicheng, professor at Beijing’s Central University of Finance and Economics. Projects funded by special debt should achieve a balance between funds raised and profits. And projects need to be reviewed carefully to avoid inflated earnings and other issues, and to ensure that the debt and interest is repaid on time.

The issuance of a great amount of special debt is unlikely, as otherwise local governments’ leverage ratios will rise too quickly, Feng said. When necessary, policy financial tools can also be used to expand sources of funding for infrastructure investment.

Editors: Liao Shumin, Kim Taylor

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Keywords:   Local Government Special Bond