Local bonds aim to meet annual quota

Provincial and city governments are working to meet their annual bond issuance quota despite the fact that in the first half of the year, they had reached far less than 50 percent of their full-year allowance, according to statistics from China Central Depository and Clearing Co Ltd.

The annual quota for "special purpose bonds" is 1.35 trillion yuan ($214 billion), which was approved by the National People's Congress in March, and the quota must not be exceeded as many are struggling to manage debt burdens.

However, many local governments aim to reach their respective ceilings as they need the funds for infrastructure projects and existing debt refinancing. The special bonds are not counted as part of fiscal budgets.

Fundraising through local government bonds is expected to pave the way for an investment rebound in the July-September quarter, and local governments are aiming to raise an additional 982.7 billion yuan by the end of the year as quickly as possible to carry out debt refinancing and infrastructure investment.

The issuance of local government special bonds, an off-fiscal-budget innovative financing instrument targeting infrastructure projects, rose by nearly 125 percent in July from June, and this type of bond has become increasingly commonplace since mid-2017.

In July, 21 provincial-level regions and cities published the bidding results of special bond issuances, which totaled about 205 billion yuan compared with 90.9 billion yuan in June, the data showed.

Terry Guo, an analyst with Fitch Ratings, expects the issuance of special bonds will be expedited in the next two quarters. Given that infrastructure investment growth slowed to 7.3 percent in the first half, compared with 21.1 percent during the same period last year, "there is still ample headroom for bond issuance.

"The bond proceeds are expected to be used for infrastructure projects such as toll roads and property projects offering good returns," he said.

A statement from last week's State Council meeting indicated that investment-which can increase quickly and on a large scale as an engine to respond to economic growth headwinds-will be a key driver of domestic demand for the rest of this year to offset possible negative impacts from external uncertainties.

"Everything, including stimulus measures from more proactive fiscal policy, should be within a safe range, or a legal framework," said Qiao Baoyun, head of the academy of public finance and public policy under the Central University of Finance and Economics in Beijing.

"We cannot afford a wild credit boom from implicit avenues, such as 'off-balance sheet' local government financing vehicles, or a more severe slowdown could be ahead if we risk a debt crisis."

Under the current scenario, local special bonds are backed by the credit history of the relevant government.

Fitch's Guo said: "The introduction of more special bonds can increase the transparency of local government's debt level and ensure the authority to more efficiently and effectively gauge a local government's leverage."

China will face pressure in the next three years, when much of the debt accumulated in the wave of the 2008 crisis will expire. According to July data, about 50 percent of the collected money from special bonds will mainly be used to pay back earlier debt issued before 2015.