The Chinese Ministry of Finance is expected to issue 6 trillion yuan (US$843 billion) of ultra-long special treasury bonds in the coming three years to ease the local government debt crisis and stimulate the economy.
The issuance of ultra-long special treasury bonds, which have maturities of more than 10 years, is a part of China’s efforts to boost its economy through fiscal stimulus, Caixin reported on Monday, citing several unnamed sources.
After the People’s Bank of China (PBoC) and financial regulators on September 24 unveiled interest rate and reserve requirement ratio (RRR) cuts and vowed to stop home prices from falling, stock investors had been speculating about the size of the government’s potential stimulus package.
Liu Shijin, a top economist and the former deputy president of the China State Council’s Development Research Center, said in the 5th China Macroeconomy Forum on September 21 that the central government should raise 10 trillion yuan by issuing ultra-long special treasury bonds within one to two years.
He said the central government should use the proceeds from bond issuance to buy up unsold homes from the markets in the short run and accelerate urbanization over the medium term.
Liu’s comments had contributed to the recent stock market rally in mainland China and Hong Kong.
Since September 24, both the Shanghai Composite Index and the Hang Seng Index had gained 27% until they peaked on October 8 and 7, respectively.
Over the past week, many stock investors have been reducing their holdings due to the perceived under-delivery of China’s economic stimulus package.
The Shanghai Composite Index has declined 8.5% from its peak of 3,498 on October 8 to 3,201 on Tuesday. The Hang Seng Index has lost 12% from 23,099 on October 7 to 20,318 on Tuesday.
A live-mic whisper
In a media briefing on October 12, Finance Minister Lan Fo‘an said the central government would significantly increase debt by issuing ultra-long special treasury bonds to help resolve China’s local debt problems. But he refused to disclose the scale and timing of the bond issuance plan.
During the media briefing, when Deputy Finance Minister Liao Min was asked by a journalist about the bond issuance size, Lan told Liao with a whisper not to disclose it for the time being because “the size is big.” Lan’s whisper to Liao was heard by the media as his microphone was on.
Prior to that, Bloomberg reported on October 11 that a majority of 23 investors and analysts it surveyed were expecting China to deploy as much as 2 trillion yuan in a stimulus package to shore up its economy.
Reuters reported on the same day that markets were expecting Beijing to announce 2 trillion to 3 trillion yuan in new spending.
These forecasts were actually not far from the newly-reported 6 trillion yuan package as half of the larger sum will come from an existing special bond issuance program.
In March this year, the Ministry of Finance said it would issue up to 1 trillion yuan of ultra-long special treasury bonds in 2024. It said local governments can use half of the proceeds to repay debt while the central government can use the remaining half.
In the first three quarters of this year, a total of 752 billion yuan of ultra-long special treasury bonds have been issued, some of which have maturities of up to 50 years.
If the Finance Ministry continues this program, it will be able to raise an additional 3 trillion yuan over the next three years.
Under this program, local governments can receive 500 billion yuan of loans each year but this will not be enough to cover the interest payment of the outstanding local debt, which has grown to 43.6 trillion yuan at the end of August 2024 from 40.7 trillion yuan at the end of 2023. The average maturity of the outstanding local debt is 9.4 years while the average interest rate is 3.15%, according to the Finance Ministry.
Claire Xiao, a senior credit analyst at Fidelity International, said in a report earlier this year that China’s public debt is about 70% of the country’s gross domestic product at the end of 2023. But she added that China’s government debt to GDP ratio is about 130% if an additional 60 trillion yuan worth of local government financing vehicle (LGFV) loans is included.
A basket of measures
In the media briefing on October 12, Lan said Beijing will unveil a basket of incremental fiscal policy measures to:
- reduce risks of local and LGFV debt,
- replenish state-owned banks’ tier-one capitals,
- stop home prices from falling,
- grant subsidies to underprivileged families and scholarships to students and
- increase people’s overall consuming power.
He said Beijing’s stimulus measures will not be limited to these areas as there is still room for the central government to raise debt and increase fiscal deficit.
A commentary published by Yicai.com said it’s possible that Beijing will unveil more details about the issuance of sovereignty and special bonds after the National People’s Congress standing committee holds its regular meeting later this month.
Read: Chinese stocks cool down as investors check reality
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