China is stepping up its policy support for the economy, pressuring local governments to speed up the sale of bonds to fund infrastructure spending.
(Bloomberg) — China is stepping up its policy support for the economy, pressuring local governments to speed up the sale of bonds to fund infrastructure spending.
Regulators have told local authorities to use up this year’s quota of special purpose bonds by the end of next month, according to people familiar with the matter, and for the proceeds to be put to use by the end of October.
Bloomberg calculations show borrowing costs for local governments have already risen, underscoring the financial stress some provinces are under and rising bond supply anticipated by investors. The yield on one of the bonds issued by Jilin province jumped to the highest in nearly two years relative to those of the sovereign, the figures show.
Authorities are focusing now on policy implementation after issuing a raft of pledges in recent weeks — including from the Communist Party’s Politburo — to get the economy’s recovery moving again. The central bank on Tuesday urged lenders to cut mortgage rates to revive the struggling property market.
The latest push “suggests a re-acceleration in infrastructure investments in the near term, as the third quarter will likely continue to see a big drag from property investments,” said Michelle Lam, greater China economist at Societe Generale SA.
Even so, the move doesn’t translate into “more actual spending,” she said, keeping her forecast for infrastructure investment growth unchanged at around 7% for this year. The pace slowed to 7.2% in the first half of the year from 9.4% for the whole of 2022, according to government data.
Beijing has stopped short of providing major monetary and fiscal stimulus to boost the economy, and it’s unclear if the acceleration in bond sales will have a material impact on growth this year.
Some economists have estimated a lag of about a month between local government debt sales and actual investment made. Xing Zhaopeng, a senior China strategist at Australia & New Zealand Banking Group Ltd., also pointed out that investment returns on infrastructure projects have been declining for 10 years already, making it difficult to find viable ones.
Provinces “may not use the money very effectively” despite the rush to sell special bonds, said Xing. “Even private companies cannot find good projects to invest, not to say the government.” Local governments have “multiple objectives” to achieve other than profits, such as for public good, he said.
Bond Sales
The September deadline for selling special local bonds implies an average of 645 billion yuan ($89.8 billion) of the bonds will hit the market in each of the next couple of months, according to Bloomberg calculations. A total of 2.51 trillion yuan of this year’s new special bonds was sold as of the end of July, the data shows, and sales in previous months this year have never exceeded 430 billion yuan.
Chinese provinces have already seen their borrowing costs climb in recent days amid a retreat in the broader bond market.
Jilin in the northeast this week priced a 15-year special bond at 3.15%, 35 basis points above the reference of a 5-day average sovereign yield prior to the auction date. The yield premium was the largest in local government debt auctions after December 2021, according to Bloomberg compiled data. In July alone, 18 local government notes were priced with yield premium of more than 25 basis points above the rate on the central government’s debt, versus the total of seven such notes throughout 2022.
The waning investor appetite has driven some regional authorities to take the rare move off calling for meetings with financial institutions in recent weeks. The motive is to gauge demand among those institutions and find out the best timing and pricing for their bond issuances, according to people familiar with the matter.
Officials are also turning their focus to reviving the property market after the Politburo indicated more policy easing. The People’s Bank of China said in a statement Tuesday it will guide banks to lower existing mortgage rates, adopting slightly stronger language to push for more lending in the sector.
The policy aims to discourage home owners from repaying their mortgages ahead of schedule. A few local lenders have already moved to offer temporary preferential rates on existing mortgages or to renegotiate home loans with borrowers in cities like Guangzhou in the south and Changzhou in the east, since the PBOC first hinted at the policy at a briefing earlier.
On Tuesday, Chifeng in the northern region of Inner Mongolia loosened rules for homebuyers applying for a government-run mortgage program, according to an announcement from the city’s Housing Fund Management Center.
Market Rally
The Politburo last week also pledged to boost consumption, resolve local government debt, and invigorate the capital market, sparking a rally in Chinese stocks. Government departments and agencies have followed up with a string of support measures, ranging from expanding purchases of cars and home goods, to boosting loans to private businesses and renovating so-called urban villages in the country’s biggest cities.
On Wednesday, the Ministry of Finance announced it’s extending some tax incentives for small companies by four more years through the end of 2027. That came after the State Council, China’s cabinet, said earlier this week that it’s studying on policies to follow up on supportive measures that are expiring.
Investors are betting that regulators will act swiftly on the Politburo’s promises of support after weeks of disappointment over a lack of execution. Chinese shares traded in Hong Kong have gained about 6% since the top leaders met last week. The mainland’s CSI 300 Index of stocks has advanced 4.3%.
However, economists have cautioned that authorities have stopped short of announcing large-scale stimulus and some of the measures, such as those intended to bolster confidence among private businesses and consumers, will take time to have an effect on growth.
–With assistance from Rebecca Choong Wilkins.
(Updates with more details.)
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