Bonds to bolster disaster relief work

China's 1 trillion yuan issuance to strengthen infrastructure and promote consumption

China's issuing of an additional 1 trillion yuan ($136.7 billion) in government bonds will facilitate the reconstruction of areas hit hard by natural disasters, bridge the gap in disaster prevention and relief work, and bolster the nation's overall resilience to natural disasters, officials and experts said.

Noting that the bond issuance is slated for the final quarter of 2023 — with 500 billion yuan to be deployed this year and the balance next year — analysts said the huge amount will also expand demand and help get economic growth off to a good start in 2024.

The decision of the State Council, China's Cabinet, to issue additional government bonds was approved in late October by the Standing Committee of the National People's Congress, the nation's top legislature, along with a decision to adjust the 2023 central budget plan.

Over 7.5 trillion yuan worth of bonds were issued by China in the first three quarters of this year. The new issuance of bonds is expected to raise the nation's fiscal deficit ratio to approximately 3.8 percent this year, up from the target of 3 percent set at the start of the year, according to the Ministry of Finance.

The funds will be channeled toward eight major areas, including rebuilding disaster-hit areas, key flood control projects, natural disaster emergency capacity improvement, and urban drainage and waterlogging prevention and control, said Zhu Zhongming, vice-minister of finance.

Parts of Beijing, Tianjin and Hebei province were severely damaged by downpours this summer and require major post-disaster reconstruction. The more frequent occurrence of various extreme natural disasters in recent years has increased the requirements for China's disaster prevention, mitigation and relief capacity, experts said.

A total of 142 county-level regions and 5.53 million people in Beijing, Tianjin and Hebei were affected by the flooding, resulting in direct economic losses of approximately 166 billion yuan, said Gou Husheng, chairman of China International Engineering Consulting Corporation. He added that most of these regions are located in mountainous areas or flood storage areas with weak economic foundations.

The deficiencies in China's development of flood control infrastructure, disaster relief, and emergency responses were brought to light during the recent deluges, said Yang Ping, director of the Academy of Macroeconomic Research's Investment Institute. It's imperative for the government to expedite infrastructure construction to shore up weak links, Yang said. However, the mounting expenditure faced by affected localities makes it difficult to meet these demands primarily through subnational authorities' investment and financing capabilities, he added.

The central government's leverage ratio, by global standards, remains at a relatively low level among major economies, which leaves ample room for scaling up fiscal spending and policy regulation, he said, calling the new bond issuance "an important measure" to improve people's livelihoods, better coordinate security and development and advance high-quality development.

Following preliminary screening, more than 7,000 projects for post-disaster and prevention work have been found to qualify for support, and could benefit from the 1 trillion yuan issuance.

Meanwhile, local governments have stepped up preparedness for the projects, said Luo Guosan, director of the National Development and Reform Commission's Department of Infrastructure Development. These efforts have laid a solid foundation for channeling project funds in a targeted and timely manner, which will also increase economic activity as quickly as possible, Luo said.

The new bonds, issued for local use through transfer payments, are all listed as part of the central fiscal deficit, and debt servicing is borne by the central government. Subsidies to entice investment from the private sector could be raised, when appropriate, as part of the central government's efforts to boost support for local governments, said Yang Yongheng, associate dean of the China Institute for Development Planning at Tsinghua University, adding this will alleviate the pressure of considerable local debt.

In addition to helping rebuild areas devastated by this year's floods and improving infrastructure to cope with future natural disasters, analysts said that the bond issuance will help drive domestic demand and further consolidate the recovery of the economy. Data recently released by the National Bureau of Statistics showed that the country's GDP expanded by 4.9 percent in the third quarter, up 1.3 percentage points over the previous quarter and growing 5.2 percent year-on-year over the first three quarters.

The world's second-largest economy has grown faster than expected in recent months and could meet its annual growth target of around 5 percent, said Luo Zhiheng, chief economist at Yuekai Securities. However, despite the sustained economic recovery, problems such as insufficient aggregate demand and sluggish market confidence still exist, he said.

The announcement of the additional bonds overshot market expectations, signaling the country's commitment to pro-growth policies. It also provided a boost for infrastructure construction and helped drive overall demand to lay a solid foundation for the economy in the fourth quarter and next year, Luo said.

There should be no concern about meeting the yearly economic growth target, said Feng Jianlin, chief economist at Beijing FOST Economic Consulting Co. However, the challenge of sustaining growth will be greater next year.

While the first quarter of 2023 saw the best economic performance so far this year, the first quarter of 2024 will see greater pressure. In order to help the country's economy get a sound start next year, it's crucial to front load fiscal stimulus, Feng said.

Half of the additional bond issuance will be used this year and the other half will be saved for next year. This means the effects of pro-growth policies will be ongoing throughout the first half of 2024, and the economy's growth impetus rejuvenated, Feng added.

To improve fiscal support for the economy, China will also allow local governments to front load part of their 2024 bond quotas to maintain steady investment, expand domestic demand and strengthen weak links.

In addition, China will roll out a package of measures next year to assist real estate, manufacturing, infrastructure and other key sectors to secure economic growth, Feng said, adding that the bond issuance in November and December will put more strain on liquidity, increasing the possibility of the central bank cutting the reserve requirement ratio.