Jul 30, 2020 04:01 AM

China Pushes Local Governments to Borrow $220 Billion by Oct. 31

Local governments are prohibited from using special bond proceeds to repay existing debt, fund white elephant projects or pay pensions.
Local governments are prohibited from using special bond proceeds to repay existing debt, fund white elephant projects or pay pensions.

China’s central government is pushing local governments to issue the remaining 1.51 trillion yuan ($220 billion) of new special-purpose bonds that are intended to spur the economy by the end of October — and they can’t use the borrowings for just any old thing.

In a notice issued Wednesday, the Ministry of Finance published a list for how the money from special bonds can’t be used. The negative list includes replacing existing debt, funding white elephant projects, paying wages and pensions, buying land and investing in real estate projects.

The document reiterates that the funds from new special bonds must be used for public welfare projects that generate income. The amount of financing should be balanced against expected revenue. Such projects include transportation infrastructure, energy, agriculture, forestry, water conservancy, ecological and environmental protection projects, livelihood services, temperature-controlled supply chain facilities, municipal administration and industrial park infrastructure, the ministry said.

In this pandemic-plagued year, the central government authorized local governments to borrow 74.4% more for special projects than last year, increasing the allotment to 3.75 trillion yuan for 2020 from 2.15 trillion yuan in 2019. As of July 14, 2.24 trillion yuan of such special bonds were issued. In addition, local governments still have nearly 2 trillion yuan of general-purpose bonds to issue, setting up the next three months for a surge of public borrowing.

Earlier this month, the State Council, China’s cabinet, decided to allow local governments to use part of the proceeds from special bonds to buy convertible bonds sold by some small and medium-sized banks to shore up lenders and support struggling small businesses amid the coronavirus crisis.

But the cabinet didn’t specify how much money could be used to buy bank bonds or which banks will qualify. Caixin reported exclusively in June that around 200 billion yuan of the special bond quota is being earmarked for the initiative.

Local governments are encouraged to issue longer-term special bonds to support projects that need more time to build and operate, such as railroads, toll roads and water conservancy projects. But governments should also evaluate their debt repayment capacity and financing costs and set reasonable bond maturities to avoid pushing debt repayment responsibility to future governments.

Contact reporter Denise Jia ( and editor Bob Simison (

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