China moves to aid slowing economy by accelerating issue of 1 trillion yuan of local government bonds

China has given local governments more leeway to borrow money to fund local infrastructure projects this year, as it seeks to boost investment in construction to support growth. Beijing has brought forward 1 trillion yuan (US$142.3 billion) of the 2020 special purpose bond allowance to this year, giving local governments more room to issue bonds to finance projects. The finance ministry said local governments should start issuing debt “as soon as possible” to make sure there was no lapse in funding for projects set for early next year of that were already underway. “Local authorities should allocate the bond quota to specific projects, ensure its early issuance and have effects shown in early next year,” the ministry said in a statement on Wednesday. The accelerated quota was equivalent to 47 per cent this year’s total allowance, underscoring just how much money the government is seeking to spend on new local government projects. China’s economic growth slowed to 6 per cent in the third quarter, its lowest rate since quarterly statistics were first released in 1992. The pace of growth is widely expected to slow further in the fourth quarter and into 2020 as the economy battles domestic headwinds and a trade war with the United States. But the increased bond borrowing will add to China’s growing debt problem, which was reignited after the government switched priorities last July from reducing debt to supporting growth after the trade war with the US began. The country’s overall debt reached 251.1 per cent of gross domestic product at the end of September, up from 245.2 per cent a year earlier, according to data from the National Institution for Finance and Development. The growing need for new borrowing also makes clear how weak local government finances are. Revenues have plummeted since Beijing mandated personal and business tax cuts over the past year. Local finances have also been hit by the national economic slowdown and lower revenue from land sales due to a weaker property sector. The government intention to stabilise economic growth with proactive fiscal policy is obvious this year, but funding restraint is also a reality Xie Yaxuan “The government intention to stabilise economic growth with proactive fiscal policy is obvious this year, but funding restraint is also a reality,” said Xie Yaxuan, chief macro analyst at China Merchants Securities. Local governments exhausted this year’s original special bond issuance limit of 2.15 trillion yuan (US$355.6 billion) by the end of September. Official data has underlined the need for China to kick start local infrastructure projects, with investment in infrastructure, which accounts for nearly one third of total fixed asset investment, dropping to a historically low level of 4.2 per cent in the first 10 months of this year. Xie estimated local special bond sales would jump next year, possibly reaching 3.5 trillion yuan (US$498 billion) in 2020. Liu Xuezhi, a senior researcher with the Bank of Communications, said this year’s increase in the bond issuance limit had raised market expectations that the government would authorise more than 3 trillion yuan (US$426.7 billion) of local special bond borrowing next year. “However, the support won’t lead to a big rebound in investment, because other backdoor funding channels, including by [local government] financing vehicles, remain targets of government scrutiny,” Liu warned. Beijing began a deleveraging campaign three years’ ago to reduce debt and risky lending, targeting especially the massive increase in “hidden” debt that is held off-budget by local governments, including borrowing by local government financing vehicles (LGFVs). LGFVs, which are used by provincial and lower level governments to evade restrictions on borrowing from banks, are a major source of China’s hidden debt, which is estimated to be as high as 30 trillion yuan (US$4.2 trillion), according to rating agency China Chengxin International. The acceleration of local government bonds issuance was part of Beijing’s efftorst to stabilise the economy, according to Morgan Stanley. “The key source of support would be higher issuance of local government special bonds, which would be US$100-125 billion more than in the past 12 months, partly offsetting a potential decline in net land sales revenue amid a slowing housing market,” the bank’s chief China economist Robin Xing wrote in the 2020 outlook last week. China’s State Council, headed by Premier Li Keqiang, has ruled out an all-out stimulus to boost the economy, instead talking more about “effective investment” while highlighting large government projects included in the next five-year plan. The cabinet has fine-tuned its funding policy in recent months, lowering the capital requirements of some infrastructure projects and also planning the use of public-private partnership to leverage private investment.