In an exclusive interview, we delve into the current landscape of China’s local government bond issuance. According to data from the first three quarters of this year, local governments in China have issued around 6.7 trillion yuan, which translates to approximately $947.1 billion. Notably, about 2.5 trillion yuan—or roughly $353.4 billion—of this total has been earmarked for refinancing existing debts, illustrating a prevalent strategy of borrowing to settle old obligations.
Recent insights highlighted by Yicai Global reveal that nearly 70% of the newly minted bonds are aimed at infrastructure investments. This trend is particularly relevant as local fiscal revenues have been slowing down in recent years, resulting in heightened pressure on repayment obligations for local governments. Consequently, they are increasingly turning to refinancing approaches to maintain a steady flow of bond issuance.
If we exclude the 2.5 trillion yuan allocated to refinancing, the net issuance of new bonds in the first three quarters stands at approximately 4.2 trillion yuan, which is about $593.7 billion. With a total new bond quota for local governments set at 4.62 trillion yuan, it appears that only around 420 billion yuan remains available. This suggests that the window for issuing new bonds is closing quickly.
Among the newly issued bonds, special and general bonds comprise about 3.6 trillion yuan and 600 billion yuan, respectively. The focus of these funding efforts shows that around 33% of special bond funds are directed towards infrastructure projects in municipalities and industrial parks. Furthermore, transportation infrastructure, including railways and urban transit systems, receives around 21% of the investment.
Data from the China Minsheng Bank Research Institute indicates that a significant 68.3% of funds generated from recent special bonds have been allocated specifically for infrastructure construction in the same period.
China has recently rolled out a set of economic stimulus measures. With cuts in reserve requirements and interest rates now in place, market observers are eagerly awaiting forthcoming fiscal policies. Experts recommend an increase in the issuance of national bonds and special purpose bonds, alongside revitalizing special bond quotas to moderately expand fiscal spending and reinforce economic stability.
Luo Zhiheng, Chief Economist at Yuekai Securities, suggests that there is potential for increasing this year’s budget deficit through the issuance of more national bonds. This would ensure that essential spending is maintained, allowing for targeted subsidies to vulnerable groups, such as unemployed college graduates and elderly rural residents. Moreover, it could also support local debts and contribute to a real estate stability fund aimed at facilitating property delivery and enhancing stability within the real estate sector.
