In an ambitious bid to address its mounting local government debt crisis and stimulate the economy, the Chinese Ministry of Finance is set to issue an estimated 6 trillion yuan (US$843 billion) in ultra-long special treasury bonds over the next three years. These bonds, which will have maturities exceeding 10 years, are part of a broader fiscal stimulus strategy aimed at fortifying the nation’s economic recovery, according to a report by Caixin on Monday, citing unnamed sources.
This move follows recent monetary policy adjustments by the People’s Bank of China (PBoC) and other financial regulators, who on September 24 announced interest rate cuts and reductions in the reserve requirement ratio (RRR), along with pledges to halt declining home prices. These initiatives have sparked considerable speculation among investors regarding the size and nature of China’s anticipated stimulus package, with the bond issuance plan now being seen as a central component of that strategy.
The proposed issuance of ultra-long special treasury bonds comes at a time when China’s economy is facing multiple headwinds, including sluggish growth, property market instability, and rising local government debt. With local government debt swelling to 43.6 trillion yuan as of August 2024, up from 40.7 trillion yuan at the end of 2023, the need for decisive action is clear.
Liu Shijin, a leading economist and former deputy president of the China State Council’s Development Research Center, voiced strong support for the bond issuance strategy. At the 5th China Macroeconomy Forum on September 21, Liu called for the issuance of 10 trillion yuan in ultra-long special treasury bonds within one to two years, emphasizing that the proceeds should be used to purchase unsold homes and accelerate urbanization efforts in the medium term. His comments helped fuel a surge in the Chinese stock markets in late September and early October, with both the Shanghai Composite Index and Hong Kong’s Hang Seng Index rallying by 27% until early October.
However, as details of the stimulus package have remained vague, the initial optimism has waned. Both the Shanghai Composite and Hang Seng indices experienced significant declines over the past week, with the Shanghai index falling 8.5% from its peak on October 8, and the Hang Seng losing 12% from its October 7 high.
China’s local government debt crisis has been a growing concern for policymakers and investors alike. Many local governments have relied on borrowing to finance infrastructure projects and other initiatives, accumulating significant debt in the process. The issuance of ultra-long special treasury bonds is intended to help manage this debt by providing local governments with much-needed liquidity.
In a media briefing on October 12, Chinese Finance Minister Lan Fo’an stated that the central government would significantly increase its debt levels by issuing these bonds, although he refrained from providing specific details on the size or timing of the plan. An interesting moment occurred during the briefing when Deputy Finance Minister Liao Min was asked about the bond issuance size. Lan whispered to Liao not to reveal the figure, inadvertently allowing the media to overhear his comment that “the size is big.”
Prior to this, Bloomberg had reported on October 11 that a majority of 23 surveyed investors and analysts expected China to deploy a 2 trillion yuan stimulus package. Similarly, Reuters noted that markets anticipated an announcement of 2 to 3 trillion yuan in new spending. The recently reported 6 trillion yuan figure aligns with these expectations, as half of the package will stem from an existing bond issuance program.
The 6 trillion yuan issuance plan will be implemented over a three-year period, with 3 trillion yuan expected to come from the continuation of an existing special bond issuance program introduced earlier this year. In March, the Ministry of Finance announced plans to issue up to 1 trillion yuan in ultra-long special treasury bonds in 2024, with local governments allocated half of the proceeds to repay existing debt, while the central government would retain the remaining half.
Through this program, local governments can access 500 billion yuan in loans annually. However, this sum is insufficient to cover interest payments on the country’s ballooning local debt, which currently carries an average maturity of 9.4 years and an average interest rate of 3.15%, according to official data from the Finance Ministry.
To further complicate matters, Claire Xiao, a senior credit analyst at Fidelity International, stated earlier this year that China’s public debt stood at around 70% of the nation’s gross domestic product (GDP) by the end of 2023. Factoring in additional liabilities from local government financing vehicle (LGFV) loans, estimated at around 60 trillion yuan, China’s total debt-to-GDP ratio balloons to approximately 130%.
As China moves forward with its bond issuance plans, Finance Minister Lan also indicated that the government would implement a range of fiscal policy measures designed to alleviate the risks posed by local government and LGFV debt, support economic growth, and stabilize the housing market. During the October 12 media briefing, he outlined several key initiatives.
- Reducing risks associated with local and LGFV debt.
- Replenishing the tier-one capital of state-owned banks.
- Preventing further declines in home prices.
- Offering subsidies to underprivileged families.
- Providing scholarships to students.
- Enhancing the overall consumption power of Chinese citizens.
Lan stressed that these measures would not be the extent of the government’s actions, suggesting that Beijing still has the capacity to raise additional debt and expand its fiscal deficit if necessary. This hints at further potential stimulus measures, particularly if the current package fails to deliver the desired economic outcomes.
The financial markets, which have been keenly anticipating details of China’s stimulus plan, have reacted with a mix of optimism and caution. The initial stock market rally following Liu Shijin’s comments and the PBoC’s monetary easing was driven by hopes of a significant fiscal response. However, as concrete details of the stimulus package have remained elusive, investor enthusiasm has waned.
The decline in stock indices over the past week reflects growing concerns that the government’s response may fall short of market expectations. Despite this, there is still optimism that further details about the bond issuance and other stimulus measures will be forthcoming.
A recent commentary by Yicai.com suggested that additional information regarding the issuance of sovereign and special bonds may be released after the National People’s Congress Standing Committee holds its regular meeting later this month. Such an announcement would provide greater clarity on the government’s fiscal strategy and could help restore confidence in China’s economic recovery.
The issuance of ultra-long special treasury bonds represents a bold step in China’s efforts to manage its local debt crisis and revitalize its economy. While the bond issuance program is expected to provide short-term relief to local governments, its long-term success will depend on several factors, including the effectiveness of the government’s broader economic stimulus measures, the stability of the housing market, and the ability of local governments to manage their debt levels.
If implemented effectively, the bond issuance plan could help China navigate its current economic challenges and lay the foundation for more sustainable growth. However, the sheer scale of China’s local government debt and the complexity of its economic situation mean that the path forward is fraught with risks. The central government will need to carefully balance its fiscal policies to ensure that it does not exacerbate existing vulnerabilities in the financial system.
The Chinese government as it moves to roll out its bond issuance plan and unveil additional stimulus measures. Investors, analysts, and policymakers alike will be watching closely to see whether these efforts are enough to restore confidence in China’s economic prospects and bring stability to its financial markets.
