Debt ceiling may be raised for local govts
Move to ease fiscal deficit pressure and strengthen investment, say experts
China is likely to raise the debt ceiling for local governments from next year to ease fiscal deficit pressure and strengthen investment, a key measure to stabilize economic growth against further headwinds, experts said on Thursday.
Like this year, local governments will focus more on issuing special bonds — a type of debt instrument outside the purview of fiscal deficit calculations, to raise funds for infrastructure construction projects, including transport, energy, and agriculture, they said.
An expert close to the Ministry of Finance told China Daily that the 2020 quota of new special bonds may be increased to 3 trillion yuan ($426 billion), up by about 40 percent from 2019. “The 2020 debt ceiling is still under discussion,” he said.
The Ministry of Finance has already issued a 1 trillion yuan new special bond quota and urged local governments to inject the funds raised via this debt instrument into specific infrastructure projects.
The issue is a pre-delivered amount of next year’s new special bond quota. This part of debt accounted for 47 percent of the 2019’s total quota of newly issued special bonds, which was set at 2.15 trillion yuan in March. The new quota for 2020 will be approved by the country’s top legislators next year.
The Ministry of Finance has urged local governments to speed up special bond issuances, and ensure that the front loading of debt quota will come into effect from the beginning of next year. It will also help shore up economic growth, said the statement.
If the government raises the new special bond quota to 3 trillion yuan next year, the debt ratio can be controlled and financing demands of local governments can be satisfied, said Wang Zecai, a researcher at the Chinese Academy of Fiscal Sciences under the Ministry of Finance.
“According to the current development environment abroad and at home, some measures can be explored to moderately increase the issuance of local government bonds in some regions for targeted purposes, so as to ease the pressure on local governments to repay debt and further expand financing channels,” said Wang.
During the first 10 months of this year, local governments issued bonds worth 4.28 trillion yuan, including 2.53 trillion yuan of special bonds, according to ministry data.
Increased special bond issuances will help offset the economic downside pressures due to ChinaUS trade friction, and enable fiscal policy to be an important measure to support economic growth, said Wang Hongju, an economist with the National Institution for Finance and Development (NIFD), a financial think tank.
The policy, which allows funds from the special bonds to be used as registered capital for infrastructure projects, has taken effect and stabilized enterprises’ expectations, he said. “As the fiscal spending needs to maintain a higher growth rate, it is necessary to continually increase the issuance of local government bonds.”
According to NIFD data, during the first three quarters of this year, the fiscal deficit — the part where government spending exceeds its income, accounted for 5.2 percent of the GDP, indicating a higher burden of government debt compared with the previous years.
It also showed that from January to September, the new local government bonds, including both general and special types, supported 20 percent of total spending, which was 5.5 percentage points higher than in the same period of 2018.
Wang from the NIFD said that the increasing fiscal deficit pressure, partly due to the large tax and fee reduction, may continue next year, and policymakers have to take steps to prevent debt defaults.
New bonds can be issued to swap the debt which is becoming due, and the government can leverage foreign capital to expand financing resources to pay back the debt, economists said.