China is accelerating local government bond issuance, which is expected to hit a record high of the year in June, in an effort to stabilize economic growth and market expectations.
As of June 21, monthly local government bond issuance exceeded 594 billion yuan ($86.3 billion), and the planned issuance is over 200 billion yuan for the last week of June. As a result, the total issuance may reach 800 billion yuan for the month, according to statistics compiled by Wind, a leading financial data provider in China.
During the first five months of 2019, China issued new local government bonds worth 1.46 trillion yuan. The accumulated new bonds accounted for 47.4 percent of the quota for new local government debt of 3.08 trillion yuan for the year, according to data from the Ministry of Finance.
Most of the new local government bonds were used to finance projects including railways, water conservation and agricultural infrastructure. Among the total, 859.8 billion yuan was raised by new special purpose local government bonds.
The Ministry of Finance issued opinions concerning local government bond issuance in April, requiring various levels of local government to accelerate bond issuance and strive for the completion of new bond issuance for the whole year by the end of September.
On June 10, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly issued a notice on the work of special purpose local government bond issuance and subordinate project financing.
“The biggest highlight of the notice is to allow special purpose bonds to be used as capital for major projects which meet major decisions of the central government and have a demonstrative effect ... Breaking through restrictions that forbid the use of debt funds as capital funds for local construction projects, the new rule will help ease the problem of a lack of capital for infrastructure investment by local governments, “said Xia Yanyan and Ma Shunfu, analysts at the research department of China Lianhe Credit Rating Co Ltd, in a report.
Such projects mainly include railways, national and local highways, as well as power and gas supply projects, the report said.
Among new local government bonds issued in May at a total value of 165.66 billion yuan, 16.2 billion yuan will be used for transportation, 26.94 billion yuan for municipal construction, 20.11 billion yuan for land reserves, 67.61 billion yuan for low-rent, affordable and public rental housing, as well as shantytown renovation, and the rest will be used for science, education, healthcare, social security, environmental protection and poverty alleviation, according to the Ministry of Finance.
The analysts with Lianhe Credit Rating estimated that about half of the 1.3-trillion-yuan special purpose local government bonds to be issued will be used for infrastructure investment mentioned in the notice.
Apart from accelerating local government bond issuance, China also expanded the channel of issuance and the range of target investors by launching a trial program this year to sell local government bonds to individual and corporate investors at bank counters in certain municipalities, provinces and autonomous regions, at a minimum amount of 100 yuan.
So far, two batches of local government bonds have been sold at bank counters. While the first batch was special purpose bonds aimed to support land reserves and shantytown renovation, the second batch targeted more diversified projects including toll roads and sewage treatment.
“The stabilization of economic growth will mainly rely on making stronger efforts on China’s domestic demand side. Currently, whether the efforts to improve weakness in the infrastructure sector will take effect or not still remains as the core problem … Given the context of the issuance of the notice, we expect that special purpose government bond issuance will speed up again, accompanied by an increase in the proportion of medium and long-term corporate loans to new yuan loans,” said Steven Zhang, chief economist with Morgan Stanley Huaxin Securities Co Ltd.