China’s Local Government Special Bond Issuance Expected to Exceed 1.35T in 2019

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Domestic experts see the issuance of local government special bonds rising past the 1.35 trillion yuan threshold next year.

The first ten months of 2018 saw the issuance of 4.0554 trillion yuan in local government bonds according to data from China’s Ministry of Finance, of which new special bonds accounted for 1.3207 trillion yuan.

New special bonds issuance for January-October accounted for 98% of the 2018 quota of 1.35 trillion, which means that the remaining 29.3 billion yuan could be fully issued by the end of November.

October saw the issuance of 256 billion yuan in local government bonds, of which 128.7 billion yuan were standard bonds and 127.3 billion were special bonds.

New bonds were 107.7 billion yuan, comprised of 34.8 billion yuan in normal bonds and 72.9 billion yuan in special bonds, while roll-over and re-financing bonds accounted for 148.3 billion yuan.

Zhou Yiqun (张依群), vice-chair of the China Fiscal Budget Performance Special Committee (中国财政预算绩效专委会) said to Securities Daily he expects a further expansion in special bond issuance next year given the scope and pace of issuance in 2018, as well as shifting macro-economic trends and real micro-economic challenges in China.

According to Zhou China will face even more severe economic challenges in 2019, as well as the implementation of large-scale tax and fee reduction policies that will produce sizeable fiscal shortcomings.

Zhou forecasts an increase in local government special bonds as a share of all new bonds and the possibility that they could exceed normal bond issuance, in order to compensate for the fiscal shortfall created by tax and fee reductions.

Given that special bonds are distinguished from normal bonds by their attachment to particular products and income streams, the cash flows they produce can alleviate or cover significant operating costs, as well as provide fiscal support to reductions in taxes and fees and expedite optimisation of the government debt structure.

The 13th National People’s Congress gave its approval to a nationwide local government debt ceiling of 20.997430 trillion yuan for 2018, including a standard debt ceiling of 12.378922 trillion yuan and a special bond ceiling of 8.618508 trillion yuan.

As of the end of October China’s local government debt balance was 18.4043 trillion yuan, still well within the ceiling set by the NPC.

The standard bond balance was 10.9269 trillion yuan while the special bond balance was 7.4774 trillion yuan, for 18.4178 trillion yuan in local government bonds, and 256.5 billion yuan in non-gvoernment bond government debt .

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