Quarterly Business Magazine

China Considering Increasing Local Debt Sales to Boost Stimulus

Posted :
Tuesday, August 20, 2019

China is considering allowing provincial governments to issue more bonds for infrastructure investment, people familiar with the matter said, a move that would boost government stimulus as the economy continues to decelerate.

Policy makers may raise the annual quota for so-called special bonds from the current level of 2.15 trillion yuan ($305 billion), according to the people, who asked not to be named as the matter isn’t yet public. The amount of the increase hasn’t been decided yet, one of the people said.

One person said the plan was mentioned at a recent meeting of the State Council, or cabinet, while another said the final decision probably still needs to be approved by the National People’s Congress, China’s legislature.

The move shows that policy makers deem the current level of stimulus insufficient to counter rising headwinds such as slowing investment and the worsening trade war with the U.S. The quota for 2019 is already higher than the previous year, and the government loosened the restrictions over how the money could be used in June. Economists have raised questions over whether the money is actually being used effectively.

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The finance ministry didn’t immediately respond to a fax seeking comment on the matter.

China’s economic growth continued to soften in July after posting the weakest pace since the early 1990s in the second quarter. Morgan Stanley estimates that extra special-bond quota worth 0.75 to 1 percentage point of gross domestic product could be added. That adds to the reform to the People’s Bank of China rate system beginning this week, which is expected to entail lower borrowing costs in the short term.

“These measures are defensive in nature and may not fully offset the growth drags amid trade uncertainties,” Morgan Stanley chief China economist Robin Xing wrote in a note.

Local governments have been told to finish sales of the existing quota by the end of September. Officials had sold nearly 1.4 trillion yuan worth of special bonds in the first six months of 2019, or 65% of the full-year quota, according to data from the Ministry of Finance.

As well as providing money for infrastructure spending, allowing local governments to sell more debt after they exhaust the existing quota also helps shore up credit growth data, as the bonds sales are included in the total financing data and were a key support of the growth in lending in July.

The next meeting of the NPC is on Aug. 22 to 26, according to a statement published on the legislature’s website. The public agenda for the meeting includes a regular discussion on the government’s budget implementation this year, but it doesn’t specify if a new bond quota will be reviewed.

One of the people said that as part of the change under consideration, the Ministry of Finance may improve oversight of local government debt sales and how the money is used.

By Bloomberg News

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