(Yicai Global) Dec. 23 -- In the context of stabilizing the economy, the scale of new local government bond issuance in China is expected to continue to remain at a high level of more than CNY4 trillion (USD628 billion) next year, according to experts who spoke to Yicai Global.

This year’s new bond issuance by China’s local governments has basically been completed. And according to the Ministry of Finance, the value of the new local bond issuance in 2021 was second only to last year, reaching CNY4.47 trillion (USD701.8 billion). This included CNY820 billion (USD128.7 billion) of general bonds and CNY3.65 trillion of special bonds. As of Dec. 15, the actual issuance of special debts amounted to CNY3.42 trillion.

Bonds issued by local governments in China are mainly divided into two categories. One is special bonds to finance specific projects, and the other is general bonds issued to cover the public fiscal deficit. For debt repayment, the former uses revenue, including those from government land transfers and project proceeds, while the latter uses government financial funds.

Qiao Baoyun, head of the Central University of Finance and Economics’ China Academy of Public Finance and Policy, told Yicai Global that in theory, from the perspective of debt ratio and the rate between the year-end government debt balance and Gross Domestic Product, there is still room for further increase in the debt burden of governments at all levels. “We should continue to make good use of the policy tool of government debt to stabilize the economy.”

Statistics from the Ministry of Finance show that Chinese local government debt ratio (debt balance/comprehensive financial strength) at the end of last year was 93.6 percent, still significantly lower than the internationally accepted control standard of 100 to 120 percent.

For local infrastructure construction, it is certainly more effective to issue local bonds to raise funds, because debt repayment pressure can force local governments to improve the efficiency of capital use and enhance governments’ governance capabilities. Qiao added.

However, on the other hand, in the context of the expected continued decline in land transfer income next year, and the issuance of special bonds in the fourth quarter of this year exceeding CNY1 trillion, most of which will be carried forward to next year’s use, many analysts believe that the newly-added special bonds in 2022 may be slightly lower than this year.

The experts said that this was partly due to the fact that the redemption of special bonds mainly relies on income from the sales and transfer of land and the land market is volatile, which increases the repayment risk of such debt.

“Facing great pressure to stabilize growth, local governments should next year increase the scale of issuance of general bonds while slightly reducing that of special debts,” Wen Laicheng, a professor at Central University of Finance and Economics, told Yicai Global.

Luo Zhiheng, deputy director of Yuekai Securities’ research institute, pointed out that in the context of a decline in the actual available financial resources of local governments, if the value of special bonds continues to stay at a high level, it may challenge the sustainability of local debt.

Realistically, if the income from projects supported by special bonds continues to decline, the issuance risk of this type of bond will gradually increase, Luo analyzed. This may result in such bonds eventually having to be repaid through the use of financial funds and becoming de facto general bonds.

“Faced with insufficient financial resources currently, local governments need to raise funds through the issuance of general bonds,” Qiao suggested. “And it is expected that the proportion of general bonds will gradually increase in the future.”

Luo said that in the context of continuously promoting the equalization of basic public services, the focus of local governments’ fiscal expenditure is gradually tilting from traditional infrastructure to the field of people’s livelihood. This makes optimizing the structure of local government debt, that is, increasing the proportion of general debt and lowering that of special debt, an essential choice.

Editors: Tang Shihua, Peter Thomas