China is set to become the world’s biggest issuer of local government bonds within the next five years, according to Qiao Baoyun, head of the Academy of Public Finance and Public Policy at the Central University of Finance and Economics.
Qiao said to the China Daily that Beijing’s debt restructuring reforms are driving a surge in the issuance of local government bonds – in particular the recently introduced special bonds whose returns are derived from the earnings of specific investment projects.
“In 2018, local governments are predicted to issue more new bonds than last year, with a larger proportion, or up to 50 percent, being the special bond, which may lead to a rise of the debt ceiling to more than 20 trillion yuan,” said Qiao.
According to Qiao China’s outstanding local government bonds, which currently stand at 14.74 trillion yuan ($2.3 trillion) could soon increase by more than 50%, putting it ahead of the United States.
As of the end of 2017 the total local government balance was 16.47 trillion yuan, as compared to an official debt ceiling of 18.82 trillion yuan.
A senior official from the Ministry of Finance said to the China Daily that the ministry plans to expand the issuance of local government special bonds this year, as part of efforts to firm up economic growth by means of active fiscal policy.
The ministry will report the potential issuance amount to China’s National People’s Congress prior to the release of the annual fiscal budget in March.
The special bond was first introduced last year, as part of efforts to control the increase of “invisible” local government debt via illicit or covert means, by providing regional authorities with an officially approved channel for raising funds.
“Once the back door is closed, the front door (of bond issuance) should be opened wider to guarantee capital that is needed by the local governments,” said Qiao.
The special bond is repaid from the earnings of specific investment projects, such as subways and toll roads, as opposed to local government revenues
The first special bond was issued by the municipal government of Beijing in July 2017, for the purpose of land purchases.
Figures from China’s Ministry of Finance indicate that the special bond balance had risen to 158.95 billion yuan by the end of September.
Analysts note that because the issuance of special local bonds as approved by the National People’s Congress is not included in calculations of the budgetary deficit, they can increase the tolerance for a bigger deficit within the fiscal budget.