Explainer | China’s special-purpose bonds: what are the risks and rewards of infrastructure-fuelled debt?
- Special-purpose bonds are a form of off-budget debt that cash-strapped local governments use to raise funds, usually for large infrastructure construction projects
- China’s local governments are increasingly using special-purpose bond revenue to boost their local economies, but debt-fuelled infrastructure spending comes at a price
To prop up their economies, China’s local governments are on a borrowing spree to fund infrastructure projects amid weak growth and diminished revenue.
These types of “special-purpose bonds” accounted for 72 per cent of all Chinese government bonds issued in the first half of the year, according to US rating agency Moody’s.
Their surging popularity as a means to jump-start economic engines across China also comes as local government revenue from land sales has plunged due to regulatory tightening in the property sector.
Tack on the financial impact of China’s strict coronavirus controls, and many local authorities find themselves in the unenviable position of trying to help the central government meet its economic growth targets.
That’s where special-purpose bonds come into play.
What are special-purpose bonds?
Special-purpose bonds are a form of off-budget debt that local governments use to raise cash for a particular policy, or to solve a certain problem. And these primarily involve infrastructure investments.