China weighs more stimulus, considers $139 billion of debt issuance under special bonds

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 urbanization, according to the report.

Previous sales of such bonds have been rare. In the aftermath of the Asian Financial Crisis in 1998, 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 worth of those bonds to pay for pandemic response measures. 

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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. 

Rigid 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 report added. Last year, China 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 per cent 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 has not contributed to the headline deficit ratio, according to the report.

The ultra-long bond design means proceeds will be repaid over several decades, lowering the pressure to make payments in the short term. This 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 that called the issuance of such debt a likely toolkit for fiscal easing this year. 

Local governments in China are working on project pitches and the sales would be planned for the second half of this year. About half of the proceeds from the extra debt sale announced in October are still being sorted for use at the start of 2024, according to the Bloomberg report.

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.

Meanwhile, China’s President Xi Jinping on Tuesday stressed the high-quality development of China’s financial sector and vowed to accelerate the creation of a modern financial system with Chinese characteristics, the Xinhua News Agency reported. Xi made the remarks at the opening of a study session at the Party School of the CPC Central Committee, according to the official state news agency.

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Published: 16 Jan 2024, 02:37 PM IST