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Yu Miaojie: China Gov't, Local Gov'ts To Boost Bond Sales


BEIJING (MNI) - China could issue up to CNY1 trillion of special CGB China Government Bonds or expand issuance of infrastructure-backed special-purpose debt by local governments to fund increased fiscal spending to counter the economic impact of the coronavirus outbreak, government advisors told MNI.

"However it's labelled, the government will almost certainly boost fiscal funding to cover extra-budgetary spending on epidemic control," said Liu Xiangdong, deputy director of economic research at the China Center for International Economic Exchanges, adding that the authorities will be keen for the target of doubling GDP since 2010 to be met.

"If the epidemic can be controlled by the end of March, CNY1 trillion of special CGBs should be enough given the multiplier effect," said Liu, adding that the epidemic has dented the economy by around CNY1 trillion so far, and that Q1 growth could fall to 5.3-5.6%. If quarantines continue in force into the second quarter outside the epidemic's epicentre in Hubei province, growth could slip to 4.5-5%, Liu added. The advisor said he had upgraded Q1 forecasts as employees return to workplaces and factories.

On Sunday, President Xi Jinping pledged to make fiscal policy "more effective", and to expand local government special bond issuance, which do not appear in headline central government accounts. Nor do special CGB issuances, which in 1998 and 2007 were accounted for in budgets for government managed funds instead of being included in the fiscal deficit.

But, as debt increases, and GDP slows, China's leverage will rise. Liu thinks the central government still has room for more debt, with its outstanding bonds totaling CNY16.7 trillion by the end of 2019, representing a leverage ratio of 16.8%, according to a quarterly report by the National Institution for Finance & Development. The overall ratio for all of China's government was 38.3%.


Any issuance of special CGBs should be capped below CNY1 trillion, given that the epidemic should be shortlived,said Yu Miaojie, deputy dean of the National School of Development at Peking University, who advises several government departments. Long-duration CGBs could support infrastructure investment, said Yu, who added that the central government could sustainably expand its fiscal deficit to 4% of GDP.

Yuan denominated CGBs would mainly be issued via ChinaBo Development Bank, and Agricultural Development Bank of China, said Yu. Exim Bank of China may also participate in the sale, making some issuance of dollar bonds possible, he said.

But CGB sales face an administrative obstacle, as they would require the approval of the National People's Congress, originally due to sit in March and now suspended due to the virus. This might make issuance of local government special purpose bonds a more practical option, Yu said.

In addition, advisors remain divided over potential CGB issuance to fund what they view as a short-term economic problem, said Zhang Yiqun, director of a fiscal studies institute affiliated with the Jilin province finance department.

Local government bond issuance will spike in March as the economy, including local bureaucracies, returns to more normal work patterns, said Zhang. If the central government front-loads special bond quotas around that time, it could signal more aggressive debt expansion this year, he said. So far, quotas for CNY1.29 trillion in issuance of local government special bonds have been granted ahead of the National People's Congress, when the annual quota is expected to be released.

The government could expand quotas above CNY3 trillion, from CNY2.15 trillion in 2019, Zhang said, although he noted the lack of viable infrastructure projects which could feasibly provide the necessary revenues needed to pay back the debt. One area for investment could be public health, whose shortfalls have been exposed during the epidemic, he added, although the economic impact of such projects is lower than that from construction of railways or highways.

As government-led investment rises, and local government financing vehicles take advantage of historically low yields, there is a danger that implicit debt grows, with the central government regarded by investors as likely to foot the bill if bonds go bad, Zhang warned.

(From MNI, by Wanxia Lin)