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Economy

China hastens bond sales to fuel infrastructure buildup

Provincial governments eat into 2020 issuance quotas as tax revenues fall

A worker installs steel rebars on a construction site of a highway in China's Xinjiang Uighur Autonomous Region.   © Reuters

BEIJING -- China has allowed local governments to raise more funding from the bond market than planned this year to keep them investing in infrastructure amid an uncertain economic outlook.

Earlier this month, the State Council -- China's cabinet -- instructed provincial governments to finish issuing special infrastructure-funding debt the under 2019 bond quota by the end of September and allocate proceeds to projects by the end of October.

Since this leaves no leeway for bond issuance in the last three months of this year, local governments can take the unusual step of using part of next year's quota.  Up to 1.85 trillion yuan ($260 billion) worth of local government debt issuance, including ordinary bonds, can be front-loaded to 2019 from 2020.

Beijing's loosening of infrastructure-financing rules also includes letting provincial authorities use bond proceeds for a broader range of projects. The government seeks to underpin slowing local economies, but the moves risk increasing their dependence on investment for growth.

This year's quota for  infrastructure-financing bonds was boosted to a record 2.15 trillion yuan, up 800 billion yuan on the year. Local governments issued 1.68 trillion yuan worth of such debt in seven months to July alone, using up 78% of the annual quota -- 36 percentage points more than in the same period a year earlier.

Work has stalled on this monorail project in Shandong Province for lack of funding. (Photo by Issaku Harada)

Last December, the government was authorized by the National People's Congress, China's parliament, to move up part of annual quotas for local bond issuance to the preceding year. From 2019 to 2022, up to 60% of the authorized amount may be used the year before.

In the past, these quotas were usually approved by the National People's Congress in March, and bond issuance would begin in April or May. This year, it began in January, another unusual development.

China will increase effective investment to stimulate domestic demand, Vice Finance Minister Xu Hongcai told a news conference earlier this month. Infrastructure investment climbed just 3.8% on the year in the first seven months of 2019.

China has also relaxed other infrastructure-financing rules. Local authorities had been required to make provisions for 20% to 40% of project costs out of tax revenue and other non-debt income. But after this restriction was lifted in June, they are now allowed to use proceeds from sales of infrastructure bonds for these provisions, meaning projects can be financed entirely with debt.

Beijing has also expanded the list of projects that can be financed with infrastructure debt. When the bonds debuted in 2015, proceeds were allowed to be used only for highways, high-speed rail, power plants and natural gas facilities. Six more categories have been added, including airports, seaports, parking structures and waste-processing facilities. Low-income areas can also be redeveloped with the money as well.

China is loosening these rules partly because local governments have seen their revenue fall as a result of tax cuts worth 2 trillion yuan, part of a stimulus package announced in March.

Last week's move by the People's Bank of China to cut banks' reserve requirements, which will unleash 900 billion yuan in liquidity, is also seen as helping promote local bond issuance.

One type of investment prohibited under front-loaded issuance of infrastructure bonds is real estate, including construction of shopping centers, as the government remains vigilant about a property bubble.

The expected increase in local government debt issuance raises concerns that the public sector will crowd out private borrowers in the bond market. To prevent this, a State Council committee vowed in late August to further link fiscal and monetary policies.

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