China weighs more stimulus with US$139 billion of special bonds

China is considering US$139 billion of new debt issuance under a so-called special sovereign bond plan.

It’s only the fourth such sale in the past 26 years, as authorities seek more money to finance intensifying efforts to shore up the world’s second-largest economy.

The proposal under discussion by senior policymakers would involve the sale of ultra-long sovereign bonds to fund projects related to food, energy, supply chains and urbanisation, people familiar with the matter said.

Prior sales of such bonds are rare: In the aftermath of the Asian Financial Crisis in 1998, for example, the government issued special debt to replenish capital for major state-owned banks. The most recent sale was in 2020, when authorities issued 1 trillion yuan (S$187.3 billion) worth of those bonds to pay for pandemic response measures. 

The deliberations underscore efforts by President Xi Jinping’s government to shift spending responsibility from debt-laden local officials to central authorities in support of an economy that is struggling to maintain momentum. Stubborn deflationary pressures, the ongoing property crisis and weak domestic demand are all weighing on activity and suppressing confidence, prompting calls among economists and investors for further stimulus.

The discussions are ongoing and the plan could be changed, the people familiar said. The Ministry of Finance did not respond to a request for comment.

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China last year also tapped into extra government bond sales to help the economy. In that case, Beijing took the unusual step of raising 2023’s fiscal deficit ratio to about 3.8% of gross domestic product – an action that involved issuing additional sovereign debt worth 1 trillion yuan to support disaster relief and construction. 

Unlike last year, the 2024 proposal would use special debt, which in the past has been counted in addition to the normal budget and hasn’t contributed to the headline deficit ratio.

The ultra-long bond design means proceeds will be repaid over several decades, thus lowering the pressure to make payments in the short term. That’s in contrast to the debt issued late last year, which included key tenor bonds to be paid back over a much smaller period of time of a few years to a decade.  

Ultra-long bonds still “may not be able to address all the fiscal challenges,” economists at Goldman Sachs Group wrote in a research note on Monday (Jan 15) that called the issuance of such debt a “likely toolkit” for fiscal easing this year. 

“We believe fiscal support should remain solid this year, but we do acknowledge the uncertainty around the exact combination of government bond issuance ahead,” they added.

Local governments in China are working on project pitches, the people familiar said. The sales would be planned for the second half of this year, one of them said. About half of the proceeds from the extra debt sale announced in October are still being sorted for use at the start of 2024. 

Economists estimate this year’s official budget deficit – which will be set in March at the National People’s Congress, a key annual political gathering – may be similar or slightly bigger than last year’s. The 2023 budget deficit reached 8.7 trillion yuan according to one broad measure, which includes the extra debt announced in October. 

Finance Minister Lan Fo’an described the government’s debt ratio as being “in a reasonable range” in an interview with state media earlier this month. He added that officials have been “appropriately expanding spending and meeting realistic needs, while saving room for tackling potential risks and challenges in the future.” BLOOMBERG