BEIJING: Chinese regional governments are now authorised to issue more than 500 billion yuan (US$72.9 billion) in infrastructure bonds by the end of October as President Xi Jinping aims to counter the economic blow of zero-Covid restrictions.
The state council approved the additional issuance at a meeting Wednesday, the official China Central Television reported. Much of the new bonds will be allocated to major cities like Beijing and Shanghai, as well as coastal provinces responsible for a large portion of Chinese economic activity.
The National People’s Congress had previously set a 3.65 trillion yuan quota for new infrastructure bond issuances for the year in March. Almost all, except for 200 billion yuan to fund capital injections into small and midsize banks, had been used up as of the end of July.
The flurry of issuances in the first half came in response to China’s sharp economic slowdown, stemming from the months-long lockdown in Shanghai and other Covid-19 restrictions aimed at keeping infections down ahead of the ruling Communist Party’s twice-a-decade congress this fall.
Thanks to the bonds, investment in infrastructure jumped 7.4% on the year for the January-July period – the largest increase for the period in five years. But employment and private-sector demand have yet to bounce back. Xi is eager to shore up the economy with an eye on his third term at the party’s helm, a post he aims to secure at the autumn congress.
Chinese authorities cap not only the issuance of new infrastructure bonds but also their outstanding balance. The maximum balance allowed for 2022 is 21.81 trillion yuan. The actual balance stood at 20.26 trillion yuan as of the end of June.
Combined with the bonds slated to help small and midsize banks, this leaves room for around 1.2 trillion yuan in additional issuances that can be authorised.
Beijing and wealthy coastal areas have traditionally had high balance ceilings, meaning greater capacity to issue additional bonds. They are also home to many potentially profitable projects and are considered to be at lower risk of defaulting, given the strength of their economies.
Excessive bond issuances could compound default risks for regions hit especially hard by the slowing economy. But focusing on infrastructure development in coastal areas could exacerbate inequalities between them and the rest of the country.
There is also concern that contracts and other benefits from regional infrastructure projects go disproportionately toward state-owned enterprises. SOEs logged a 9.6% year-on-year increase in fixed-asset investment for the January-July period, compared with 2.7% for private-sector companies.
China also ramped up issuance of infrastructure bonds by around 70% in 2020, the year that the coronavirus first dealt a blow to the economy. Investment by SOEs increased 5.3% that year, while investment by private-sector companies increased 1%. Further bond issuances could increase China’s dependence on the public sector, benefiting SOEs while squeezing the private sector.