In hopes of salvaging a sputtering economy, China is poised to issue a staggering 1 trillion yuan ($139 billion) in new debt under a “special debt issuance plan.” The move marks only the fourth occasion of such a sale in the past 26 years, and is seen as a bold step by the Chinese government in fortifying its struggling real-estate and banking sectors.
This proposal, which is currently under deliberation by senior policymakers, aims to fund vital projects in areas such as food, energy, supply chains, and urbanization, according to a Bloomberg report. The use of “ultra-long sovereign bonds” for this purpose signifies a strategic shift in economic planning to provide long-term funding for its debt-saddled local governments, experts say.
Economic boost or bust
Following the Asian Financial Crisis in 1998, China issued similar special debt to rejuvenate major state-owned banks. The most recent occurrence was in 2020, with bonds issued to finance pandemic response measures. These historical precedents highlight the Chinese government’s tendency to resort to special debt issuance in times of economic distress or significant national challenges and underscores the rarity of the proposed bond sales.
China’s current economic landscape is marred by rigid deflationary pressures, a continuing property crisis, and weak domestic demand — all of which are hampering economic activity and dampening investor confidence. The situation has triggered calls from economists and investors for more robust stimulus measures.
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China’s leader Xi Jinping’s administration is evidently responding to these challenges by redirecting spending responsibility from heavily indebted local authorities to the central government. This strategic pivot aims to provide a more coordinated and effective economic support system, says financial advisor Marco Olevano.
“[The] new debt issuance under this so-called special sovereign bond plan is a way for authorities to seek more money to finance efforts to shore up the world’s second-largest economy,” Olevano said in a post on social media platform X (formally known as Twitter).
This fiscal maneuvering is part of China’s broader strategy for economic resilience and growth, the report notes. During a study session at the Chinese Communist Party (CCP) Central Committee, Xi vowed to expedite the creation of a modern financial system to revamp the country’s financial sector.
The hefty proposal is also unique in that it involves the use of special debt, which historically has not been included in the regular budget and does not affect the headline deficit ratio. This approach indicates a shift in fiscal strategy — differentiating from last year’s fiscal deficit ratio, which was increased to about 3.8 percent of the GDP and involved the issuance of additional sovereign debt.
The ultra-long nature of the proposed bonds, with repayment periods spanning several decades, offers a less burdensome short-term repayment obligation compared to the debt notices issued in 2023. This characteristic of the bonds significantly eases immediate financial pressures and allows for a more gradual and sustainable repayment plan, says Olevano.
“As China’s unprecedented housing slump continues, major Chinese lender Ping An Bank has put 41 developers on a list of builders eligible for its funding support, as it considers more lending to a property sector in crisis,” he adds.
Double-edged sword
Despite the plan’s potential, economists at leading financial and investment firm Goldman Sachs have noted that ultra-long bonds “may not fully resolve” all of China’s fiscal challenges. In a research note, they suggested that the issuance of such debt is likely to be a crucial component in China’s fiscal easing toolkit this year as it tries to keep the greater economy afloat.
“As you stack further policy relaxations, you can still get the firepower ammunition equivalent of something close to a bazooka stimulus,” Jason Pang, a portfolio manager at JPMorgan Asset Management, told Bloomberg during an interview.
As local governments in China prepare their project pitches, the sales of the bonds are planned for the latter half of the year. Approximately half of the proceeds from the extra debt sale announced last October are still being allocated at the start of 2024, according to the Bloomberg report.
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Economists also predict that this year’s official budget deficit, which is set to be announced in March at the National People’s Congress, may be similar or slightly larger than last year’s. The 2023 budget deficit reached 8.7 trillion yuan by one broad measure, including the extra debt announced in October.
Despite most financial agencies agreeing on China’s tanking economy, the country’s Finance Minister Lan Fo’an described the government’s debt ratio as being “within a reasonable range.” He emphasized that the government has been “expanding spending judiciously” and meets current needs, while reserving capacity to “address potential future risks and challenges.”
