Caixin
Nov 06, 2020 05:28 AM
ECONOMY

Local Governments Near Completion of Annual Special Bond Borrowing

The central government authorized local authorities to borrow 74.4% more via special bond issuance than last year, increasing the allotment to 3.75 trillion yuan for 2020.
The central government authorized local authorities to borrow 74.4% more via special bond issuance than last year, increasing the allotment to 3.75 trillion yuan for 2020.

Local governments in China have completed issuance of most of the 3.75 trillion yuan ($560 billion) of special government bonds planned for the year to fund infrastructure investment and support the revival of the virus-hit economy, according to the Ministry of Finance.

By the end of October, 94.6% of the planned issuance of special-purpose bonds was completed, finance ministry data showed. New government borrowing totaled 4.49 trillion yuan. Special-purpose bonds provide an off-budget source of financing for local government projects and are meant to be repaid from income generated by the projects they invest in.

To help the economy rebound from the pandemic, the central government authorized local authorities to borrow 74.4% more via special bond issuance than last year, increasing the allotment to 3.75 trillion yuan for 2020 from 2.15 trillion yuan in 2019.

The central government encouraged the expansion to bolster the economy and defuse risks. In July, 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.

Apart from 200 billion yuan designated to replenish banks’ capital, 99.9% of the planned special-purpose bonds have been issued, the ministry said.

To ensure that the borrowing is properly managed, Beijing reiterated that 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. The State Council in September warned that proceeds from the special-purpose bond issuance are barred from investment in land purchases, property development projects or debt repayment.

About 55% of the newly issued bonds were used to fund local infrastructure such as urban utilities, industrial facilities and transport. The rest of the proceeds were spent on public services, environment protection and shanty town renovation projects, according to Liu Yu, analyst at Guangfa Securities.

Local governments were also 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 conservation projects. According to Liu’s calculation, the average maturity of the special bonds issued during the first 10 months was 14.87 years, compared with the average of 10.26 years in 2019.

More than 311 billion yuan of the funds, or 9% of the total issuance, were used as initial capital for projects, lower than the 25% limit set by the government. Projects using the bond proceeds as initial capital were mainly railway and road construction projects in less developed areas, according to Liu.

Contact reporter Han Wei (weihan@caixin.com) and editor Bob Simison (bobsimison@caixin.com).

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