Can China walk out of economic difficulties by relying on its old playbook of debt?
- China’s National People’s Congress Standing Committee authorities a new wave of infrastructure bond issuance worth US$202 billion ‘ahead of schedule’
- A surge in local government debt may complicate Beijing’s long-term goal of reining in financial risks
China is banking on a new wave of debt-fuelled infrastructure spending to arrest a deepening economic slowdown, but the surge in local government debt may complicate Beijing’s long-term efforts of reining in financial risks in its economy.
In an unusual move last week, China’s National People’s Congress Standing Committee authorised the central government to allocate the local government debt quota “ahead of schedule”, breaking what is only a ceremonial arrangement that Beijing has to include a nationwide debt quota in its budget report approved by the parliamentary gathering in March before it can allocate quotas to local authorities.
Beijing is seeking to implement a “proactive fiscal policy” to stimulate economic activities when China’s growth is set to decelerate further after the headline gross domestic product growth rate dropped to the lowest level in a decade in 2018.
The government immediately approved local governments to issue bonds worth 1.39 trillion yuan (US$202 billion), made up of 810 billion yuan (US$117.82 billion) in the special purpose bonds, and the remaining 580 billion yuan in general bonds.
Special purpose bonds differ from traditional local government general bonds in that they are repaid by returns on projects instead of by the government.
