In-depth: Behind China's Decision to Issue 1 Billion Yuan Bonds

Credit: Visual China

BEIJING, October 25 (TMTPost) – China has decided to issue an additional 1 trillion yuan in government bonds in the fourth quarter, at a time when the economic recovery in the third quarter exceeded expectations.

Why was the decision made and how will the funds be used?

During China’s cabinet State Council's routine policy briefing held on Wednesday, officials from the Ministry of Finance and the National Development and Reform Commission (NDRC) explained the relevant issues.

On Tuesday, the sixth session of the 14th National People's Congress Standing Committee approved the State Council’s proposal to issue additional government bonds and adjust the 2023 national budget plan. It was clarified that China will issue an additional 1 trillion yuan in government bonds in the fourth quarter of 2023, and these bonds will be allocated to provincial and municipal governments through transfer payments, with a focus on supporting post-disaster recovery and addressing weaknesses in disaster prevention and mitigation. The aim is to enhance China's ability to withstand natural disasters.

Where will the government bonds go?

As to whether the additional government bonds is issued to boost the economy, Deputy Minister of Finance Zhu Zhongming stated that the main purpose of issuing government bonds is to meet the directives from the Central Political Bureau's meeting on August 17, supporting projects for post-disaster recovery and reconstruction, as well as improving disaster prevention and mitigation capabilities. "Of course, after the funds are put to use, they will objectively help stimulate domestic demand and further solidify the positive trend of economic recovery,” he said.

Zhu summarized eight major areas where the government bonds will be used, including post-disaster recovery and reconstruction in the Beijing-Tianjin-Hebei region, major flood control and river management projects in the northern regions such as the Haihe and Songhua River basins.

Zhang Shixin, Deputy Secretary-General of the NDRC, stated that the agency is leading the development of a plan focused on post-disaster recovery and enhancing disaster prevention and mitigation capabilities, with the Beijing-Tianjin-Hebei region as a key area. The issuance of government bonds will strongly support the implementation of this plan. One of the top priorities for the use of the bonds is the recovery and reconstruction of water-damaged facilities, including the restoration and rebuilding of public service facilities closely related to people's livelihoods, such as hospitals, schools, elderly care, childcare, and public sports and cultural facilities. The issuance will also accelerate the repair of water-ravaged farmland and promote the reconstruction of infrastructure like transportation to ensure that the above-mentioned projects are completed to high standards before the arrival of the main flood season in 2024.

In addition to post-disaster recovery and reconstruction, another major focus of the additional government bonds is flood control and river management of key river systems. Luo Guosan, Director of the Fixed Asset Investment Department of the NDRC, explained that the focus will be on the Haihe and Songhua River basins and the systematic advancement of flood control projects for major rivers, large-scale reservoir projects, and flood storage projects. These are commonly referred to as the "three key components" of flood control projects, with embankments as the first line of defense, reservoirs as the main line, and flood storage and detention areas as the last line.

The issuance of the additional government bonds will be managed on a project-by-project basis. The NDRC, in collaboration with the Ministry of Finance and other relevant authorities, will follow the principle of "funds and resources follow the project" to advance the implementation of relevant projects. Zhang stated that since September, the NDRC and others have been actively selecting and preparing a batch of key projects, establishing project work mechanisms to ensure that once the government bond funds are in place, they can quickly and accurately reach specific projects. In the next steps, they will review and submit a series of projects that have mature preliminary work, and deliver good economic and social benefits.

Luo emphasized that for new construction projects funded by the additional government bonds, there is a requirement for thorough preliminary research and ample prior work foundation, so the construction can be started as soon as possible. Especially for urgently needed projects, they should be completed and put into use before the 2024 flood season. For some major projects with more complex preliminary work, they should, in principle, commence construction no later than the end of June 2024.

Included in the direct fund monitoring system

Issuing government bonds mid-year and adjusting the national budget is not a common practice in China. To address the impact of the Asian financial crisis, China increased government bond issuance and adjusted the national budget for three consecutive years from 1998 to 2000. The issuance of 1 trillion yuan in government bonds this time has raised the deficit ratio to around 3.8%, significantly exceeding historical levels.

Zhu stated that although the deficit ratio for 2023 has seen a slight increase, the Chinese government's debt ratio remains within a reasonable range, and overall risks are manageable.

He further explained that the issuance will all be arranged for local use through transfer payments, and it will be categorized as part of the national government's deficit. The principal and interest payments will be borne by the national government. The preliminary plan for the use of the government bond funds is to allocate 500 billion yuan in 2023 and carry forward 500 billion yuan for use in 2024, based on the progress of relevant work.

Since October, China’s local governments have resumed the issuance of special local government bonds as part of the comprehensive debt replacement program initiated by the central government. As of Tuesday, the planned issuance scale revealed by 24 provinces and cities has exceeded 980 billion yuan. With the addition of the 1 trillion yuan in government bonds to be issued in the fourth quarter, there may be a significant impact on the bond market.

Zhu mentioned that in order to accelerate budget spending and promote economic recovery, the Ministry of Finance made relevant plans when formulating the 2023 second-half government bond issuance plan, prioritizing the issuance of the annual government bonds originally scheduled for later in the year. This created room for subsequent government bond issuances. Considering that this round of government bond issuance is included in the national government's deficit management and will be conducted through open public offerings, it will be coordinated with the already scheduled annual government bond issuances. Furthermore, the authorities will closely monitor the economic situation and bond market conditions, reasonably pace the issuance of government bonds, aligning it with the progress of fund utilization to ensure smooth issuance and avoid idle funds.

Moreover, to alleviate the financial pressure on local governments, the Ministry of Finance will appropriately raise the central financial subsidy standards or subsidy ratios in relevant areas. A specific project of "post-disaster recovery and enhancement of disaster prevention and mitigation capabilities subsidy fund" will be set up as a stand-alone item in central-to-local transfer payments, alongside general transfer payments and special transfer payments, to reflect the spending arrangements for the additional government bond issuance. To enhance fund management, all government bond transfer payment funds will be included in the scope of direct funds from the Ministry of Finance, and they will be fully integrated into the direct fund monitoring system, enabling comprehensive tracking and monitoring throughout the entire process.