China’s Ministry of Finance is considering allowing local governments to sell 1.5 trillion yuan (US$220 billion) of special bonds in the second half of this year, an unprecedented acceleration of infrastructure funding aimed at shoring up the country’s beleaguered economy.
The bond sales would be brought forward from next year’s quota, according to people familiar with the discussions, who asked not to be identified because they aren’t authorized to speak publicly. It would mark the first time the issuance has been fast-tracked in this way, underscoring growing concerns in Beijing over the dire state of the world’s second-largest economy.
Previously local governments didn’t start selling the debt until Jan. 1, when the new budget year begins. The proposal to adjust that timeline would therefore need to be reviewed by the State Council and might also need approval from the country’s legislative body, the National People’s Congress.
The debt would mostly be used to pay for infrastructure spending, an old playbook that policy makers are using to boost an economy hit by Covid lockdowns and a housing slump. The funding would add to 1.1 trillion yuan in new support for infrastructure announced over the past few weeks, as President Xi Jinping’s government tries to get the economy back on track toward achieving its annual growth target of around 5.5%.
Commodities rallied in European trading hours following the news, with copper extending gains to as much as 3.6% to US$7,789 a ton on the London Metal Exchange.
“It has been clear for sometime that local governments need more money. The news today suggest that the central government is still unwilling to expand its own balance sheet, and instead let local governments to bring borrowing quota from 2023, which means a fiscal cliff next year,” said Wei Yao, head of research for Asia Pacific and chief economist at Societe Generale SA.
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Still, it remains “very very challenging” for China to achieve its growth target, she said, sticking to the bank’s call of a 4% expansion this year.
China’s Ministry of Finance and the National Development and Reform Commission didn’t immediately respond to faxed requests for comment.
Each year local governments receive a quota for how many general and special bonds they can sell. Until 2018 provinces and cities would wait for the NPC meeting in March to officially approve that quota before they started selling the bonds, meaning the money wouldn’t be spent until much later in the year.
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From 2019 onwards, the central government began issuing the quotas earlier so local authorities could start selling the debt as soon as possible after the new year began. In December last year, the Ministry of Finance said it had already issued almost 1.5 trillion yuan worth of 2022’s quotas, and then pushed for all 3.65 trillion yuan worth of bonds to be sold quickly and used this year.
By the end of June, most of those bonds were sold, meaning there’s space in the second half of the year to sell more debt if the government wants to.
In 2018, the NPC allowed the State Council to start granting some of the following year’s bond quotas early but didn’t mention the timing of sales. That means allowing the use of 2023’s quota this year may need the approval of the NPC first, possibly at one of the regular meetings of its standing committee.
Separately, the NDRC, the country’s top economic-planning body, is asking regional authorities to submit plans for projects for 2023 as early as possible, people with knowledge of the matter said.
While it is a normal practice for local governments to make proposals for the next year, that process normally kicks off in the last quarter of each year, one of the people said. Some provinces were told to start new projects when feasible even if the construction was originally scheduled to start next year, one of the people said.
The government’s growth target for 2022 is looking increasingly challenging amid Covid resurgences and a property downturn. Economists surveyed by Bloomberg forecast the economy will grow 4.1% this year.
