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China’s debt-fuelled growth came to a grinding halt after Beijing launched the deleveraging campaign against the country’s property sector, which previously contributed nearly 30% to the GDP and held over 70% of China’s household wealth. In 2023, Beijing is widening the scope of China local government bonds, with plans to issue a record quota for special local government bonds.
Officials in China are likely to scale up special local government bond quota to 3.8 tn yuan ($560 bn), higher than the previous record of 3.75 tn yuan.
Local China bonds a boon or bane?
Local government China bonds help regional authorities to raise money out of their budget boundaries but put a systemic burden on their balance sheets. Beijing has been pushing for these types of special debt notes in a bid to fuel growth in the country which was hit by the collapse of the real estate sector and incessant Covid lockdowns.
The annual quota is a limit of bond issuances by local governments each year, and 2022 was an exception as the issuance of special bonds exceeded this quote as local governments utilized quotas from previous years to fund their activities.
The off-budget special bonds raise cash for a particular policy, or to solve a particular problem, and US ratings agency Moody’s said that these types of bonds made up nearly 72% of all China bond issuances in the first half of 2022. China is attempting to jump-start its economy since the local government revenue stream from land sales has shrunk due to the crackdown on the property sector.
Meanwhile, apart from the record issuance of special bonds planned for 2023, China may target a budget deficit of around 3% of GDP this year, compared to last year’s 2.8% and 3.6% in 2022.
The special purpose bonds are a key source of funds for infrastructure projects, which market experts believe will help China achieve economic growth of 5% or higher in 2023.
However, the issue at hand is the rising level of local government debt, with an over $2 tn maturity looming in the coming years. Pressure on local governments was at a peak as they had to continually conduct mass Covid testing.
Last year, Beijing has set a target of 3.37 tn yuan for the official budget deficit, but the actual figure hit 7.75 tn yuan in the first 11 months of 2022. The question now is whether local governments in China are able to repay their obligations or run into difficulties which may cause structural issues to the economy.
Late last year, Fitch Ratings said that they believe “the potential use of incremental debt funding to fill the widening (funding) gap may come up against the annual debt quota imposed by the central government on local and regional governments.”
