Chinese provinces are rushing to sell about $225 billion worth of bonds in June. They are doing this to boost the economy, which has been hurt by COVID, by putting investments upfront. At the same time, policy advisers are calling for more debt sales in the second half.
Last week, China’s cabinet announced a number of policy changes to help the economy recover from the effects of COVID-19. However, analysts think that more stimulus will be needed to keep the recovery going.
The cabinet told local governments on Tuesday to make sure that the special bond issuance for infrastructure of 3.45 trillion yuan ($518 billion) for 2022 is finished by the end of June. This is three months earlier than the original deadline, which was set for the end of September. This was done to encourage more investment.
This means that provinces will need to issue nearly 1.5 trillion yuan in the next few weeks. As of May 27, the finance ministry had issued 1.85 trillion yuan, which is 54% of the total. By the end of August, the money that was raised will be put to use.
Analysts at Guosheng Securities said that the move could put more pressure on market liquidity and force the central bank to pump out more cash, possibly through the bank’s medium-term lending facility and a cut in the reserve requirement.
Analysts say that the money raised could be used to help expand into new infrastructure focused on 5G, AI, and data, since the returns on traditional projects like roads, trains, and airports are now much lower.
China’s cabinet said on Tuesday that it had given the green light to new types of energy and infrastructure projects.
Beijing has usually done things like increase spending on infrastructure to help its economy, but in the past, this has led to a number of “white elephant” projects.
Beijing’s zero-COVID policy is making it harder and harder to help the economy, so Premier Li Keqiang said last week that policy support needs to come early and that China will try to get positive year-over-year growth in the second quarter.
Many private-sector economists think that the world’s second-largest economy will shrink in the April-June quarter. This would be the first time since the first quarter of 2020, when the economy went into a deep slump, that the economy has shrunk.
MORE STIMULUS IS REQUIRED
Analysts think that more stimulus will be needed in the coming months as Chinese cities lift lockdowns. There is a chance that new outbreaks could lead to more restrictions if China doesn’t change its COVID policy as a whole.
Most of Shanghai’s 25 million people will be able to move around more freely starting Wednesday.
Policy experts and think tanks are calling for the central government to issue special bonds to help COVID-affected sectors and keep spending on infrastructure in the second half.
Jia Kang, head of the China Academy of New Supply-side Economics, told Reuters, “We should prepare for it, and the size should be about the same in 2020.”
Jia, who used to be head of the finance ministry’s think tank, said, “Reaching the annual growth goal will be very hard, but we should at least try.”
Many economists believe China wants its economy to grow by about 5.5% this year, but that goal is becoming increasingly difficult to achieve.
A think tank called the China Wealth Management 50 Forum has called for the government to issue around 2 trillion yuan in special treasury bonds. This is because the economy needs to grow by 6.5% in the second half of the year to grow by nearly 5% for the whole year.
In a political year like this one, when President Xi Jinping is expected to win a third term as leader in the fall, it is even more important to get the economy back on track.
Guosheng Securities thinks that these bonds will be worth between $1 and $1.5 trillion and that most of them will be sold in August and September.
Zhang Ming, a senior economist at the Chinese Academy of Social Sciences, a top government think tank, said that the government should raise its target deficit to 3.0–3.2 percent of GDP.
Any plans to raise the budget deficit or issue special treasury bonds would need to be approved by parliament, and policy experts say that before taking any more steps, policymakers should look at how the current stimulus is working.
A policy insider said, “There isn’t a lot of room to invest in infrastructure, and we need to make sure we don’t do the same projects and get a return on our investments.”
In 2020, China sold special treasury bonds worth 1 trillion yuan to pay for economic stimulus and help the economy recover from the effects of COVID-19.
(1 yuan = 6.6631 renminbi Chinese yuan)