Top policymakers will allow local governments to inject more funds raised through bonds into large infrastructure construction projects, and the measure will help strengthen economic growth amid external headwinds, experts said.
A document jointly drafted by the Ministry of Finance, the National Development and Reform Commission and the People’s Bank of China, has been sent to provincial-level local governments and permits funds from special-purpose bonds to be used for railways, highways and electricity and gas-supply projects.
It will improve infrastructure financing which will not increase local governments’ budget deficits, said experts familiar with the matter.
“The move will facilitate the efficiency of fiscal and monetary policies to support economic growth, but local government debt levels will be tightly controlled,” a senior official from the Ministry of Finance’s Budget Department, who declined to be named, said on June 10.
Financial officials reiterated recently that China still has plenty of policies in its toolkit to offset the impact from the ongoing trade tension with the United States.
According to the document, more long-term special-purpose bonds will be issued, and maturities could extend to 10 years from the current three to five years. More financial institutions, including insurers, will be encouraged to purchase the bonds.
Policymakers are considering allowing retail investors to buy local government savings bonds, a new class of bonds in China that allow more individual investors to hold local government debt, with certain non-withdrawal periods as with ordinary savings deposits. But specifics on the proposal have not yet been determined, said a source from the ministry.
“Financial institutions are allowed to make independent investment decisions based on market-oriented rules, and their financing activities should not increase local governments’ contingent liabilities,” said the document.
It added that the new policy permits local government financing vehicles to continually raise funds, coordinate with financial institutions, support infrastructure and avoid project suspensions resulting from capital shortfalls.
“The new policy is a signal of more proactive fiscal policy to stabilize economic growth, and fund resources will be substantially increased for infrastructure construction,” said Zhou Wenyuan, a researcher at Guotai Junan Securities.
According to the Ministry of Finance, in the first five months of this year, local governments issued a total of 1.46 trillion yuan ($210 billion) in bonds, accounted for 47.4 percent of the 2019 annual quota of 3.08 trillion yuan. Among bonds issued, 859.8 billion yuan was for special-purpose bonds.
Qiao Baoyun, dean of the China Academy of Public Finance and Policy at Central University of Finance and Economics in Beijing, said that the measure will not increase the “hidden debt” of local governments. Instead it will make financing processes more transparent.