China Expands Use of Local Government Debt in Stimulus Push

(Bloomberg) -- China will ease restrictions on how local governments can spend money raised through sales of so-called special bonds, in a move analysts said was aimed at stemming the economic slowdown.

The Ministry of Finance will allow local authorities to use some of the proceeds from special bond sales as part of the capital for qualified major projects, and encourage banks to offer loans to projects funded by the instruments, according to a statement Monday.

The bonds are intended to allow local authorities to invest outside of their regular budgets and are to be repaid using the proceeds of the projects. Insurers are also encouraged to provide funds for qualified mid to long-term special bond projects.

The decision aims to expedite infrastructure construction by expanding the proportion of projects that can be paid for with money from the special local debt. China raised the annual special bond quota for local authorities to a record of 2.15 trillion yuan ($311 billion) in 2019, but infrastructure investment growth slowed to 4.4% in the first four months of the year amid economic uncertainty and trade tensions.

Stocks of construction companies including China Railway Group Ltd and JSTI Group advanced in mainland and Hong Kong before the noon break Tuesday.

“This policy signals a significant policy shift” in that the government is looking to use infrastructure investment to stimulate the economy instead of the tax cuts they had used before, Liu Li-gang, chief China economist at Citigroup Inc. in Hong Kong, wrote in a note. Liu said he’s more confident that infrastructure investment growth will accelerate from now, possibly to 8% by the end of 2019.

The outstanding amount of central and local government debt stood at 33.35 trillion yuan at the end of 2018, or about 37% of national gross domestic product, according to a separate Q&A published by the Ministry of Finance. China’s debt ratio is “lower than major market-economy countries and emerging market countries and its risks are generally under control,” the statement said.

Infrastructure projects in China usually require capital equal to 20% to 25% of the total investment amount, and allowing the use of special bond proceeds as capital can leverage bank loans three to four times, according to a research note from China International Capital Corp.'s Zhan Aobo.

Further details in the notice:

• It calls for better policy coordination, pledging that market liquidity will be maintained at reasonable and sufficient level to help with special bond sales
• It makes clear that provincial governments will take the full repayment obligation for special bonds sold, while project companies will repay the funding raised from financial institutions
• Local governments are encouraged to use special bonds in projects such as the Belt and Road Initiative, shanty town renovation, and urban and rural infrastructure
• It’ll push for a nationwide network with local government debt information, such as debt quota, outstanding amount and debt service ratio, in order to support more differentiated ratings and yields
• Local governments will be encouraged to sell special debt with tenors longer than 10 years

--With assistance from Claire Che, Xize Kang and Ken Wang.

To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at yzhao300@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger

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With assistance from Bloomberg