China Seen Cutting Local Government Bond Quota to Curb Debt

China is set to reduce local government bond sales and rein in its budget deficit this year, scaling back the pandemic stimulus measures that fueled debt while helping the economy recover.

The government is likely to reduce its quota for special local bonds -- mostly used for infrastructure spending -- to 3.5 trillion yuan ($541 billion) from 3.75 trillion yuan last year, according to the median estimate of 10 economists surveyed by Bloomberg. The fiscal deficit target is forecast to be cut to 3% of gross domestic product from 3.6% in 2020.

China Seen Cutting Local Government Bond Quota to Curb Debt

Beijing is set to unveil its major economic goals on March 5, when the National People’s Congress, China’s rubber-stamp parliament, convenes for its yearly meeting. Officials have already signaled they would withdraw some of the stimulus rolled out last year that contributed to the economy’s rapid V-shaped recovery.

“Curbing debt risks and capping the leverage ratio will be among policy makers’ top priorities this year after the economy rebounded,” said Bruce Pang, head of macro research at China Renaissance Securities Hong Kong.

Based on Bloomberg calculations, local government debt rose to 90% of combined fiscal revenue last year, from 83% in 2019, assuming that local governments met their revenue targets in 2020.

Anti-Virus Bonds

A decline in the quota for local special bonds would be the first since they were introduced in 2015 to fund infrastructure. Unlike general bonds that are paid back with fiscal revenue, the special bonds are repaid with income generated from specific projects.

The surveyed analysts also expect no issuance of special anti-virus bonds this year, after the government sold 1 trillion yuan worth of them last year.

Total government bond net issuance could plunge by 20%, or 1.7 trillion yuan, this year based on the forecasts for the deficit and bond quota, and assuming the economy will expand by 8% to 10%, according to Bloomberg calculations.

China’s official government debt soared to 45.8% of GDP by the end of last year from 38.5% in the year before. The actual debt level is likely to be higher since the government doesn’t include borrowing by entities such as local government financing vehicles.

Read More: China Local Governments Face Record Hidden Debt Due in 2021

Taking into account the implicit debt, the real leverage ratio has already reached 60% of GDP, a threshold regarded internationally as the prudent limit, according to Ding Shuang, chief economist for Greater China at Standard Chartered Plc in Hong Kong.

“If large-scale bond issuance continues, the debt ratio will break through the benchmark threshold,” he said.

Analysts ForecastsDeficit ratioLocal special bond quota (trillion yuan)
Standard Chartered2.8%2.1
ANZ Bank3%2.5
Citic Securities3%-3.3%3.5-3.7
China Renaissance3%3
Founder Securities3%3.5
Huachuang Securities3.25%3.6
SWS Securities3%2
Huatai Securities3.2%3.6-3.7
Hongta Securities3%3.5
Guangfa Securities3%3.5
Median3%3.5

©2021 Bloomberg L.P.

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