Local debt expected to narrow funding gap

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China's earlier and quicker issuance of 2019 new local government bonds is expected to play a major role in narrowing infrastructure funding gaps and bolstering economic growth.

Bidding on this year's first batch of local government bonds will begin on Monday, with a goal of raising more than 135 billion yuan ($19.92 billion) within a week. That accounts for nearly 6.4 percent of the country's full-year local government bond issuance in 2018, according to data released by China Central Depository and Clearing Co.

The bond issuance usually starts in March each year after the top legislature announces the annual quota.

It follows an earlier approval for part of the new quota — 580 billion yuan for general bonds and 810 billion yuan for special-purpose bonds mainly targeting infrastructure projects.

The Ministry of Finance delivered special orders to provincial-level finance departments, urging funds to be immediately injected into major investment projects.

"Any fund retention in the national treasury or other government departments is not allowed," a senior official from the ministry's Budget Department told China Daily.

The collected funds should be used as soon as possible for earlier-prepared projects including infrastructure construction, pollution prevention and shantytown renovation. It could help to stabilize investment and strengthen domestic demand, the official said.

Experts expect local government bond issuances to pick up this year to between 4.5 and 4.6 trillion yuan compared with 4.17 trillion yuan in 2018.

China's annual fiscal deficit target may be set higher at 2.8 percent of GDP, up from 2.6 percent for 2018, after policymakers called for fiscal policy to be "more proactive", according to China Bond Rating, a State-owned ratings agency.

It doesn't intend to ease local government debt regulation but to enhance debt management and moderately expand fiscal spending, the ministry official added.

Economic headwinds, including slower exports and housing price growth, led the authority to make policies more flexible and ease downside pressure.

"Early bond issuance will facilitate local governments' direct financing early enough to support capital expenditure," said Amanda Du, a senior analyst with Moody's Investors Service.

A higher local government bond quota is likely in 2019. And total local government bond issuances, including refinancing bonds, could reach 4.6 trillion yuan this year, or around 10 percent higher than 2018, said Du.

A State Council meeting held earlier this month directed local governments to complete special-purpose bond issuances by the end of September.

Chinese local government debt showed steady growth in 2018. The total rose to 18.07 trillion yuan by year end, 22.55 percent higher than a year earlier, according to China Central Depository and Clearing.

Chinese commercial banks remained the largest holder of local government bonds, investing an additional 2.6 trillion yuan — the fastest growth compared with other types of bond holders, the clearing house said.

By Sunday, eight regional and local governments had released bond issuance plans on the clearing house information platform.

To coordinate with fiscal policy, China's central bank injected 1.16 trillion yuan, the largest weekly injection in two years, into the banking sector via open market operations last week, to boost liquidity.

The measures followed a cut of banks' reserve requirement ratio that took effect this month, which freed up a net 800 billion yuan into the financial system to encourage lending to small and private businesses and drive down borrowing costs.

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