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China Considers $220 Billion Stimulus With Unprecedented Bond Sales

(Bloomberg) -- China’s Ministry of Finance is considering allowing local governments to sell 1.5 trillion yuan ($220 billion) of special bonds in the second half of this year, an unprecedented acceleration of infrastructure funding aimed at shoring up the country’s beleaguered economy.

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The bond sales would be brought forward from next year’s quota, according to people familiar with the discussions, who asked not to be identified because they aren’t authorized to speak publicly. It would mark the first time the issuance has been fast-tracked in this way, underscoring growing concerns in Beijing over the dire state of the world’s second-largest economy.

Previously local governments didn’t start selling the debt until Jan. 1, when the new budget year begins. The proposal to adjust that timeline would therefore need to be reviewed by the State Council and might also need approval from the country’s legislative body, the National People’s Congress.

The debt would mostly be used to pay for infrastructure spending, an old playbook that policy makers are using to boost an economy hit by Covid lockdowns and a housing slump. The funding would add to 1.1 trillion yuan in new support for infrastructure announced over the past few weeks, as President Xi Jinping’s government tries to get the economy back on track toward achieving its annual growth target of around 5.5%.

China’s Ministry of Finance and the National Development and Reform Commission didn’t immediately respond to faxed requests for comment.

Economists said the bond proposal wasn’t entirely unexpected given the fiscal pressures local governments are under. Revenues have plunged because of a housing market slump and tax breaks given to businesses, while at the same time spending on Covid testing and controls are being ramped up.

“It has been clear for sometime that local governments need more money,” said Wei Yao, head of research for Asia Pacific and chief economist at Societe Generale SA. “The central government is still unwilling to expand its own balance sheet” and is instead letting local governments borrow more. That means “a fiscal cliff next year,” she said.

Read more: China Data Show Economy Shrinking in Challenge to Xi’s Target

However, it’s doubtful whether Beijing can still meet its gross domestic product target for the year even if it ramps up infrastructure spending. Peiqian Liu, chief China economist at NatWest Group Plc, said the extra spending could help to boost growth in the second half of the year to about 5%, which is still not enough to meet the full-year goal.

“It definitely supports the sentiment, as people think that infrastructure will remain as a key driver,” she said. “But it takes a few quarters for investments to translate into real construction and then GDP. It’s overall still moderate and not strong enough to change GDP drastically.”

Economists surveyed by Bloomberg predict growth will reach 4.1% this year.

Commodity markets rallied on the news Thursday, with copper ending the day 4% higher on the London Metal Exchange. Tin climbed 5.2%, while zinc rose 3.7% and aluminum was up 1.4%.

What Bloomberg Economics Says...

China’s government in April promised an ‘all-out’ infrastructure push to boost the economy. It is delivering.

Local governments are under orders to meet their full-year quota for special bond issuance by June and deploy the funds by August. That points to a bigger wave of infrastructure spending ahead. It also opens the door to another quota later in the year to finance even more, if needed. The Ministry of Finance appears to be going in that direction.

Chang Shu and David Qu

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While the economy has started to rebound from the worst of the lockdowns in April and May, the outlook remains uncertain as Covid infections continue to pop up and restrictions tightened. Premier Li Keqiang said at a meeting Thursday that the economy’s “foundation is still not solid” and “strenuous effort is required to stabilize” growth.

He was speaking to top officials of five coastal regions including Shanghai, Zhejiang and Guangdong, calling on them to “introduce more supportive policies” to help businesses recover. Underscoring the pressure on local authorities, Li said the regions -- all economic powerhouses and manufacturing hubs -- should continue “shouldering the responsibility” of helping the economy grow and ensuring China’s fiscal strength.

Each year local governments receive a quota for how many general and special bonds they can sell. Until 2018 provinces and cities would wait for the NPC meeting in March to officially approve that quota before they started selling the bonds, meaning the money wouldn’t be spent until much later in the year.

From 2019 onwards, the central government began issuing the quotas earlier so local authorities could start selling the debt as soon as possible after the new year began. In December last year, the Ministry of Finance said it had already issued almost 1.5 trillion yuan worth of 2022’s quotas, and then pushed for all 3.65 trillion yuan worth of bonds to be sold quickly and used this year.

By the end of June, most of those bonds were sold, meaning there’s space in the second half of the year to sell more debt if the government wants to.

In 2018, the NPC allowed the State Council to start granting some of the following year’s bond quotas early but didn’t mention the timing of sales. That means allowing the use of 2023’s quota this year may need the approval of the NPC first, possibly at one of the regular meetings of its standing committee.

Separately, the NDRC, the country’s top economic-planning body, is asking regional authorities to submit plans for projects for 2023 as early as possible, people with knowledge of the matter said.

While it’s a normal practice for local governments to make proposals for the next year, that process normally kicks off in the last quarter of each year, one of the people said. Some provinces were told to start new projects when feasible even if the construction was originally scheduled to start next year, one of the people said.

(Updates with analysts’ comments, government meeting)

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