According to insider information from Bloomberg, the Chinese government is contemplating the issuance of special bonds amounting to 1 trillion yuan (equivalent to 139 billion USD) for utilization in stimulating economic recovery initiatives. If executed, this would mark the fourth instance of Beijing issuing such special bonds in the last 26 years.
Reports suggest that the proposal for the issuance of these bonds is currently undergoing discussions among high-ranking policy planners. These exceptionally long-term government bonds are intended for financing projects related to agriculture, energy, supply chains, and urbanization.
This category of bonds is deemed “uncommon” since China has engaged in this type of issuance only three times over the past 26 years.
The initial occurrence took place during the Asian financial crisis in 1998 when Beijing issued special bonds to augment capital for state-owned banks. The most recent issuance transpired in 2020 when the country issued 1 trillion yuan in such bonds to fund measures addressing the challenges posed by the Covid-19 pandemic.
The contemplation of issuing these “uncommon” bonds unfolds amid challenges faced by local governments in China, grappling with fluctuating budgets and substantial debt, while the world’s second-largest economy undergoes a sluggish recovery. Prolonged deflationary pressures, a real estate crisis, and diminishing domestic consumer demand are factors impeding economic activities and undermining confidence. Calls from economists and investors for more robust government support measures persist.
In 2023, the Chinese government took a relatively uncommon step by elevating the annual budget deficit ratio to approximately 3.8% of the Gross Domestic Product (GDP).
This strategic move set the stage for the issuance of an additional 1 trillion yuan in government bonds to aid in addressing the aftermath of natural disasters. However, the current proposal involves the issuance of special bonds – a distinct bond type that, in previous instances, was considered within the regular budget and did not contribute to budget deficits.
The extended maturity of these special bonds implies that the Chinese government will be repaying both interest and principal over several decades, easing short-term payment pressures. This stands in contrast to bonds issued in October of the previous year, which had shorter maturities ranging from a few years to a maximum of 10 years.
However, experts argue that even special bonds with ultra-long terms might not be enough to tackle China’s current fiscal challenges.
Economists from Goldman Sachs Group Inc. noted in a January 16 research report that China’s issuance of special bonds could serve as a means to relax fiscal policy in 2024, but they caution that uncertainties related to the issuance of various bond types still loom ahead.
The issuance of these special bonds is anticipated in the latter half of the current year, currently, around 50% of the funds raised from the bond issuance in October last year are earmarked for use in the early months of this year.
Economists predict that China’s budget deficit for 2024 may either match or slightly exceed that of the previous year, approximately totaling 8.7 trillion yuan. The precise budget deficit target will be determined during the National People’s Congress session in March.
In an early January interview with the media, China’s Finance Minister Liu Fuan asserted that China’s government debt-to-GDP ratio remains at a “reasonable level.” He further explained that authorities have increased spending in a sensible manner, meeting practical needs while retaining flexibility to address potential risks and challenges in the future.
According to Bloomberg.
By. Pham Thanh Bien
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