August 14, 2018 / 8:39 AM / a year ago

As economy cools, China sets deadline for local government special bond sales

BEIJING (Reuters) - China’s Finance Ministry told local governments on Tuesday to speed up issuance of special bonds used to fund infrastructure projects, as Beijing looks to boost investment amid slowing economic activity and trade headwinds with the United States.

Local governments in China issue those bonds for special purposes such as highway projects and shanty town redevelopment.

In guidance posted on its website, the ministry said local governments should complete no less than 80 percent of their special bond issuance quota by end-September, adding that the rest should be sold mainly in October.

Local governments are allowed to issue 1.35 trillion yuan ($196.13 billion) of special bonds this year. In the first half, more than 300 billion yuan of special bonds were issued, a pace which the Finance Ministry called “slow”.

Special bonds differ from traditional local government bonds in that they are repaid by returns on projects instead of the government’s coffers. They also come with no government guarantees.

Historically, the main buyers of such bonds have been state-owned policy banks.

Analysts say special bonds as a source of financing infrastructure projects have not gained favour with local governments, compared to using public-private partnerships (PPP) for funds, as many of these projects have low returns, or are barely profitable.

To give local governments more incentive to issue such special bonds, the Finance Ministry said it will remove restrictions on their maturities.

Serena Zhou, Hong Kong-based China economist for Mizuho, said that move “will make these special bonds more affordable for local governments to repay”.

Special bond issuances with set quotas are viewed by Beijing as a way to control “invisible” local government fund-raising through so-called local government financing vehicles (LGFVs).

LGFVs are entities created by local governments to skirt borrowing limits. Local governments have been forbidden to bail out troubled LGFVs.

On Monday, Xinjiang Production And Construction Corps Liushi State-Owned Asset Management Co, an LGFV, missed an interest payment on 500 million yuan of short-term bonds.

MORE AFFORDABLE BONDS?

Maturities on special bonds currently range from one year to two decades.

Special bond issuance will not lead to a bigger national budget deficit as they are excluded from the budget, but they will add to a broader national debt burden.

China cut its 2018 budget deficit target to 2.6 percent of gross domestic product from 3 percent in 2017 - the first reduction since 2012 - but boosted the amount of special bond issuance by local governments by 550 billon yuan to offset the drop.

As fixed-asset investment cools, Beijing has also started approving major urban railway projects again after a year’s hiatus, when authorities ordered some local officials to scrap or halt infrastructure projects due to concerns about mounting regional debt.

The National Development and Reform Commission (NDRC) has approved a 95 billion yuan ($14 billion) plan by the eastern city of Suzhou to expand its urban rail network, Suzhou Rail Transit said on Tuesday.

Data earlier on Tuesday showed China’s economy cooled further in July even without any major shocks yet from the Sino-U.S. trade war, adding to expectations that authorities will roll out more stimulus measures.

Reporting by Lusha Zhang and Ryan Woo; Additional Reporting by Yawen Chen; Editing by Kim Coghill and Richard Borsuk

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