China Is Already Tapering Stimulus With Drop in Bond Sales
China’s local authorities have slowed the pace of debt sales to finance infrastructure projects this year, evidence of a gradual tightening of fiscal policy as the government shifts its focus toward risk control.
Local governments have sold or plan to sell 222.7 billion yuan ($34.3 billion) of so-called special bonds in January to April to fund shanty town renovations, highways and other infrastructure investment, according to data compiled by Bloomberg. That’s a sharp decline from 729.6 billion yuan of debt sold in the same period in 2019 and 1.15 trillion yuan in 2020.
Investors have been on guard for signs of monetary and fiscal tightening given the economy’s strong recovery from the pandemic slump and the government’s shifting of its attention to tackling debt. While an interest rate hike by the central bank is still a distant prospect, the drop in bond sales suggest a quiet scaling back of fiscal support.
There’s been an aspiration to “steady debt growth, or even make it fall from last year,” said Zhou Hao, economist at Commerzbank AG in Singapore. Policy makers are looking for a “restrained pace of economic growth” so that they can reduce the reliance on fiscal stimulus as long as the economy keeps humming, he said.
Beijing cut the full-year quota for local government bond sales only moderately this year, allowing them to sell 3.65 trillion yuan of special infrastructure bonds. Yet unlike the usual practice of speeding up debt issuance at the start of a new year to maximize the impact, local governments have made slow progress so far, using funds carried over from last year to finance projects.
While the latest data showed local authorities have accelerated the sale of infrastructure debt this month, some analysts argue that as long as the economic rebound is firm, the funds may just be kept in reserve.
Meanwhile, the central government also softened its push on investment, cutting back approvals for fixed-asset projects sharply in the first quarter compared with previous years. They also ramped up scrutiny on new rail construction.
As a result, the shortfall between government revenue and expenditure at all levels stood at 158.5 billion yuan in the first quarter, nowhere close to the gap of 930 billion yuan during the same period in 2020, and only one third of the level in 2019, according to Bloomberg calculations of official data.
At a meeting Monday, Premier Li Keqiang asked local authorities not to relax budget discipline because of a rapid rebound in revenue income. “Local fiscal power is still pretty stretched this year” as the government has lowered the annual deficit ratio target and not issued any special sovereign bonds, he said.
China International Capital Corp. economists said slower infrastructure bond sales have been a drag on government expenditure and domestic demand, and Nomura Holdings Inc. said the growth of fixed-asset investment will continue to ease.
Even a modest slowdown in bond issuance will mean very slow growth of public-works investment in 2021, according to a report by analysts at Gavekal Dragonomics. “Reduced formal fiscal support, along with the slowing credit cycle, shows much less political urgency to support growth, and a higher priority on consolidating public finances,” they wrote.
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