China’s decision to issue 1 trillion yuan ($137 billion) in sovereign bonds, as approved by its top parliament body, aims to strengthen the economic recovery. These funds will be directed towards rebuilding regions affected by floods this year and enhancing urban infrastructure to withstand future disasters. According to Vice Finance Minister Zhu Zhongming, these funds will drive domestic demand and further consolidate the economic recovery.
China’s move to issue sovereign bonds is set to play a significant role in bolstering the nation’s economic recovery. Approved by China’s top parliament body, the issuance of 1 trillion yuan ($137 billion) in sovereign bonds is designed to support the rebuilding of areas impacted by this year’s floods and the enhancement of urban infrastructure to withstand future disasters.
Vice Finance Minister Zhu Zhongming expressed confidence in the impact of these treasury bond funds, stating that they will drive domestic demand and further contribute to the nation’s economic recovery. This move comes as China’s fiscal stimulus efforts have elevated the country’s budget deficit.
China’s economy exceeded expectations in the third quarter, improving the likelihood that Beijing can achieve its growth target of approximately 5% for 2023. However, economists note that the crisis-ridden property sector continues to act as a drag on the economy and casts a shadow on the growth outlook.
China has taken the unusual step of significantly increasing its 2023 budget deficit to around 3.8% of its gross domestic product, up from the initially set 3%, due to the rise in central government debt, as reported by state media.
While the proposed increase in bond issuance aligns with Beijing’s intention to inject additional fiscal stimulus into the economy to support the ongoing recovery, there are concerns that relying on debt-funded stimulus could undercut efforts to transition towards a consumer-led economic growth model.
Some analysts suggest that the immediate positive economic impact of the new debt issuance should not be overstated, especially in the near term. They believe the fiscal multiplier effects of spending on water conservancy projects are likely to be limited.
According to Zhu, China will reasonably manage the pace of bond issuance to match spending, and authorities will take steps to prevent the misuse of bond funds. He also stated that the government’s debt level remains within a reasonable range, although specific details were not provided.
China has room for increased government spending since its debt as a share of GDP is just 21%, significantly lower than the 76% debt-to-GDP ratio for local governments. It is expected that half of the funds raised through the bond issuance will be utilized this year, while the remaining half will be directed towards expenditures in the following year, as reported by state media.
UBS analysts anticipate that the Chinese government will raise its budget deficit and special local bond quotas for 2024, along with further interest rate cuts and reductions in bank reserve requirement ratios.
In addition to the issuance of sovereign bonds, China’s parliament has approved a bill allowing local governments to front-load part of their 2024 local bond quotas. Local governments had been instructed to complete the issuance of the 2023 quota of 3.8 trillion yuan in special local bonds by September to fund infrastructure projects.
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