(Yicai) May 6 -- Local government bond issuance in China soared 84 percent in the four months ended April 30 from a year earlier as local governments ramp up their borrowing to take advantage of low interest rates so as to lower their financing costs and to finance major new projects to fuel the economy.

China’s local governments issued CNY3.5 trillion (USD483 billion) in bonds in the four months ended April 30, according to public data. Of this, the issuance of new bonds, which are generally used to support major infrastructure or public welfare projects, surged 54 percent year on year to CNY1.5 trillion (USD207 billion), while that of refinancing bonds, which are used to repay maturing debt or swap out hidden debt, soared 116 percent to CNY2 trillion (USD276 billion).

Both the size and growth rate of local government bond issuance in China reached the highest levels in recent years in the first four months, according to the China Central Depository and Clearing’s China Bond website.

The jump in new and refinancing bond issuance reflects the need by local governments to raise funds faster to offset weak domestic demand and deal with heightened external risks, Wen Laicheng, professor at the Central University of Finance and Economics, told Yicai.

The amount of refinancing bonds issued in the first four months more than doubled year on year, largely due to increased efforts to replace hidden debts, Wen said. About CNY1.6 trillion (USD221 billion) of the refinancing bonds went towards swapping hidden debt, close to the full-year goal of CNY2 trillion, according to figures from Qiye Yujingtong, a corporate risk-tracking platform.

Interest rates are now at a historical low and so by issuing more refinancing bonds, local governments are able to cut the cost of their existing debt, said Hu Hengsong, executive deputy general manager at Caida Securities. Many bonds issued after 2019 are maturing this year, so as their fiscal pressures mount, local governments are compelled to roll over debt through new issuances.

On top of that, new bond issuance is rising sharply too, Hu said. This is because local governments are trying to ramp up investment and rely on infrastructure spending to help prop up economic growth.

Out of the CNY1.5 trillion in new bonds issued in the first four months, about CNY1.2 trillion (USD166 billion) were special bonds which are mainly used for project investments, according to data from Qiye Yujingtong. This amounts to about 27 percent of this year’s special bond quota.

Of the CNY1.2 trillion, 31 percent went to municipal and industrial park infrastructure projects, 20 percent to transportation infrastructure projects such as railways, 9 percent to urban housing renovation, 6 percent to healthcare projects and 6 percent to land reserve initiatives.

As China’s macroeconomic outlook becomes more uncertain, local government special bonds, which are a key tool of proactive fiscal policy, are expected to play an even bigger role in stabilizing and spurring economic growth, Hu said.

Editor: Kim Taylor