China wants local governments to step up annual special bond borrowing

China will ask local governments to speed up borrowing through special purpose bonds (SPBs) and meet the annual quota by November, according to the finance ministry, a move that could boost infrastructure investment and support Economic Growth.

The issuance of these special bonds, which are key instruments that partially reward investments in government infrastructure projects, has been relatively slow this year and has only accelerated since August. In the first three quarters of this year, local governments sold 2.22 trillion yuan ($ 348 billion) of special bonds, accounting for 61 percent of the quota, senior ministry official Li Dawei said on Friday. at a press conference. And in the first two weeks of October, 128.9 billion yuan of bonds were issued, according to Zhongtai Securities bond analyst Zhou Yue.

For comparison, at the end of October last year, 94.6% of the quota had been met, data from the finance ministry showed, as authorities increased spending to revive the economy affected by the pandemic.

With this year’s SPB quota of 3.6 trillion yuan, that means cities and provinces could issue up to 1.3 trillion yuan of remaining special bonds over the next five weeks, according to calculations by Caixin.

The slowness in bond sales is mainly attributed to tighter finance ministry rules that require local governments to exercise more judgment in selecting projects and balancing the amount of funding against expected revenues, according to a report. Caixin analysis.

Under new rules published at the end of June which aimed to guarantee a good return on projects and reduce the risk of repayment, an operator or a project supervisor must carry out a performance assessment and set a performance target before requesting the bonds. Performance targets should be as detailed and quantitative as possible to reflect the expected results of an underlying project, the cost of funding and the risk of insolvency, the ministry said.

In August, the ministry announced that it intensify surveillance projects and organize regular checks on the use of bond funds. Projects that seriously deviate from their performance targets will have their fund allocations suspended.

At the same time, the Ministry of Finance had focused this year on maintaining a sustained rate of emissions, unlike 2018 and 2019 where local communities were encouraged to accelerate emissions. Between July and August this year, some local governments have considered saving part of this year’s bond quota for sale in December to ensure adequate investment next year. But this arrangement may change under the new directive.

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About half of the bonds newly issued in the first three quarters were used to finance infrastructure such as transportation, government offices and industrial parks, the healthcare, culture and tourism sectors said. The remainder was allocated to projects related to agriculture and forestry, water conservation, energy, and urban and rural cold chain logistics.

These special bonds have played an important role in expanding effective investment and maintaining the stability of the economy, Li added.

If the borrowing schedule is advanced, this could lead to additional financing for projects at the end of the year and early next year, thus leading to a rebound in infrastructure investment. It is also in line with the new “inter-cyclical approach” announced by key Communist Party decision-makers in July, with the new political strategy aimed at economic stability and seeking to better steer the pace of local bond issuance and budgeted investments.

SPBs were introduced in 2015 to fund commercially viable infrastructure and public welfare projects. They are supposed to be reimbursed by the income generated by the projects they finance, unlike general obligations which can be withdrawn from general tax revenues. In 2020, local governments had quotas totaling 3.7 trillion yuan, nearly 75% more than the 2019 allocation.

Investment in infrastructure in the first nine months rose 1.5 percent year on year, an average two-year growth of 0.4 percent, according to the National Bureau of Statistics.

Contact reporter Kelsey Cheng ([email protected]) and editor-in-chief Michael Bellart ([email protected])

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