‘SPENDING IMPACT YET TO KICK IN’
Sudden surge in debt sold into market are instead having negative impact on private sector funding, say analysts
CHINA’S burst of local bond issuance to pay for infrastructure and support the flagging economy is being hampered by a lack of available projects and the negative effect it’s having on private sector funding.
Earlier this year, the central government attempted to counter the economic slowdown by ordering the accelerated sale of special infrastructure bonds, and provincial authorities have responded enthusiastically: A flurry of sales in August and last month means that 92 per cent of the 1.35 trillion yuan (RM810 billion) target for the year had been sold by the end of last month.
However, about 42 per cent of the total special bonds sold since August are earmarked for “land reserves”, which means compensating farmers for acquisitions or preparing the acreage for future development, according to analysis of bond data by Bloomberg News.
In short, the economic boost of the debt creation will be less than if it was used to build highways or redevelop sub-standard housing.
The sudden surge in such debt sold into the market has also had an indirect crowding-out impact — yields on other forms of government bonds have risen, in turn pushing up those on corporate debt.
As China seeks to buffer the domestic economy and shield it from the trade war with the United States, the difficulties around the bond programme heighten the chances the nation will just increase indebtedness without stoking growth.
Tax cuts, infrastructure spending and other fiscal stimulus measures are playing an increasing role in the efforts of Chinese policymakers to prevent the world’s second-largest economy from slowing further. But data released last week showed that the impact of government spending had yet to kick in, with infrastructure investment sliding to the slowest growth since 2014.
China started to issue special bonds in 2015 to finance projects from highways to environmental facilities and affordable homes.
The spending is seen by some as a turbocharger in boosting investment, as it stays outside the official budget deficit, and it can leverage additional bank loans and even private capital in infrastructure projects.
This year the issuance of special bonds had a slow start amid attempts to clean up the nation’s finances.
So, when the government told officials in July to pick up the pace, it led to a flood of hasty selling, and caused an “obvious substitution impact” on bank loans and corporate bonds, said the People’s Bank of China last week when it added the debt to its measure of total credit supply.
The slump in net corporate bond sales last month to 8.7 billion yuan, from 338 billion yuan in August, was “mainly due to the crowding-out effect from the surge in local government bond issuance on private sector financing”, according to Lu Ting, chief China economist at Nomura International Ltd.