Bonds help to give GDP growth a shot in the arm

China will increasingly rely on longer-term and special-purpose government bonds to finance construction and stabilize the economy, preventing the GDP growth rate slowing to a multi-decade low in the second half of this year, said economists.

In June, local governments issued 717 billion yuan ($104 billion) in special bonds, the record so far in 2019, accounting for nearly one-third of the total special bond issuance in the first half, the Ministry of Finance said on Tuesday.

During the January to June period, 64.8 percent of the funding from special bonds was directed toward fixed-asset investment, especially for infrastructure construction and shantytown renovation, said Hao Lei, head of the ministry’s Budget Department.

“The rising financing requirements for infrastructure projects will drive up effective investment and enable more private funds to spur economic growth,” said Hao.

The annual quota for special bonds was unchanged so far at 10.77 trillion yuan this year, around 44.73 percent of the total local government bond quota, according to the Ministry of Finance.

During the first half of this year, overall local government bonds, also including budgeted general bonds, increased by 2.18 trillion yuan. This amount was 70.7 percent of the new debt limit of 2019, compared with 15.5 percent at the same time last year, the ministry said.

“According to statistics reported by local governments, we predicted that the annual issuance target can be reached by the end of September, as required by the State Council’s executive meeting,” Hao added.

Policymakers issued a document in June that allowed local governments to use special bonds to raise capital for high-quality infrastructure construction projects.

The document also encouraged financial institutions to provide funding to companies related to the construction, including State-owned enterprises and local government financing vehicles, easing some previous restrictions on lending to the vehicles.

Jennifer Wong, vice-president credit officer of the Sub Sovereigns department, Moody’s Investors Service, said that the use of special bonds proceeds as projects’ capital can boost infrastructure investment and support economic growth, without adding direct debt to local governments’ balance sheets.

The Ministry of Finance also announced the first-half fiscal income and expenditure statistics on Tuesday. By the end of June, the government’s fiscal income was 10.78 trillion yuan, up 3.4 percent from a year earlier, slower than the pace of 3.8 percent in the first five months, as a result of the tax and fee reduction policy.

Tax income declined by 3.3 percent year-on-year in the second quarter, as the new value-added tax cut policy took effect in May. The overall tax income growth moderated to 0.9 percent in the first half, according to the ministry.

Given the slower income growth and the large gap of infrastructure financing, the government will rely more on funding through bonds. The special bond, which was introduced in August 2015, is a favorable instrument which can further leverage capital from other lenders, especially from the private sector, said experts.

The National Bureau of Statistics reported a rebound of fixed-asset investment by the end of June, up to 5.8 percent from 5.6 percent by May, although the overall GDP growth retreated to a nearly three-decade low of 6.2 percent in the second quarter.

To support the Ministry of Finance’s bond issuance plan in the coming months, the central bank is expected to maintain relatively lower interest rates and ample liquidity, especially in the interbank market, “until it is clear that domestic growth is rebounding”, said Lu Ting, chief economist at Nomura Securities.