China urged to ignore ‘moral hazard’ of helping indebted regions as economy-fuelling bond sales seen booming
- Nearly 1.2 trillion yuan worth of special-purpose bond quotas remain unsold, and recent Politburo promises are expected to fuel a big sell-off in the coming weeks
- But such bond sales, used to fund infrastructure, also amass large piles of debt that pose an outsized threat to not only regional economies, but to nation at large
Beijing should prioritise the nation’s economic recovery over the “moral hazard” of reducing the debt burden on local governments by introducing a lower-interest debt-swap option, according to academics and analysts.
Meanwhile, they say, special-purpose bond sales – mainly used by local governments to fund infrastructure – are expected to skyrocket through next month after recent Politburo policy shifts.
As of Monday, there was still 31.2 per cent of the quota of 3.8 trillion yuan (US$527.5 billion) worth of special-purpose bonds that needed to be sold this year, Citic Securities said in a note on Wednesday.
Special-purpose bonds have gained prominence over the years in China when it comes to their role in enabling local-level growth through fixed-asset investments. Some funds have also been used to replenish the balance sheets of the country’s financially strained small to medium-sized banks.
And now, after the Communist Party’s top decision-making body, the Politburo, vowed last month to speed up the issuance and use of local government special-purpose bonds, analysts say the logical expectation is that local governments will aggressively try to make use of the rest of their special-purpose quotas over the coming weeks and months.
“The recovery still requires fiscal support, and the necessity of fiscal efforts to stabilise growth has increased. Therefore, it is reasonable to accelerate the supply of government bonds,” Kaiyuan Securities said in a note on July 31.