(Yicai) Nov. 3 -- China’s local governments have issued CNY8.5 trillion (USD1.2 trillion) worth of bonds so far this year, exceeding the CNY8 trillion mark for the first time ever.

The milestone was reached after 24 provincial-level governments issued a total of about CNY1 trillion of special refinancing bonds last month to ease debt repayment pressures, including from so-called hidden debt.

Before the Covid-19 pandemic, local governments sold about CNY4 trillion of bonds a year, with that soaring to a record CNY7.5 trillion in 2021 and CNY7.4 trillion last year, according to Chinabond.com.cn, the bond information website run by China Central Depository & Clearing.

Refinancing bonds are one type of local government debt. The funds raised from selling these notes are mainly used to repay part of the principal on maturing local government bonds. 

Proceeds from the sale of the special refinancing bonds issued for the first time this year are mostly being used to repay their non-standard liabilities, including hidden debt, such as the debts accrued by their urban construction and investment vehicles and arrears owed to businesses.

Local governments repaid CNY3.2 trillion of debt principal due in the first three quarters of the year, 89 percent or CNY2.9 trillion of which was repaid with the proceeds of new refinancing bonds, according to finance ministry figures, showing that these authorities rely heavily on borrowing to repay debt.

Besides helping local governments to ease debt pressure, the central government is also using direct fiscal support. The standing committee of the National People’s Congress approved on Oct. 24 the issuance of additional sovereign debt worth CNY1 trillion. The funds will be handed to local governments via transfer payment, meaning they will not need to be repaid. Half of the proceeds are expected to be used this year, while the other half will be carried over to next year.

The extra CNY1 trillion issued at this point of the year can help local governments make up for the fiscal gap resulting from lower income from the auction of land-use rights, Zhang Jun, chief economist at China Galaxy Securities, told Yicai.

The central government is also expected to release next year’s local government bond quotas before the end of this year, potentially as much as CNY2.3 trillion, to ensure that local authorities can quickly promote investment in relevant projects and maintain the strength of fiscal stimulus, said Zhang Yu, chief macroeconomic analyst at Huachuang Securities.

In this context, China’s gross domestic product growth is expected to rebound to 5.5 percent this quarter and about 5.3 percent for the year, meaning that the country will achieve the “about 5 percent” target the NPC set in March, Wang Qing, chief macroeconomic analyst at Golden Credit Rating, told Yicai.

Considering that the positive impact of the new fiscal stimulus will last at least until the first half of next year, the economy could maintain a medium-to-high growth rate of about 5 percent next year, Wang added, noting that with the real estate industry gradually achieving a soft landing, China’s endogenous growth momentum will likely recover by then.

Editors: Tang Shihua, Futura Costaglione