(Bloomberg) -- When China’s Finance Minister Lan Fo’an unveiled his nation’s latest effort to support flagging economic growth, attention fell on a comment about bond issuance and its impact on spending. Unlike the US and other developed nations — where fiscal stimulus packages are typically framed as a pledge to spend a certain amount of money — in China investors take their cue from the magnitude of borrowing that will be unleashed. But there’s a variety of different debt types, reflecting the complexity of a budget system with multiple layers of authorities and different policy goals. Here’s a guide to what each type of security means.
General Sovereign Bonds
China’s official annual fiscal deficit is approved every March by the full session of the National People’s Congress, the Communist Party-controlled parliament. The deficit is funded by the issuance of general bonds. The bulk of this debt is at the central government — or sovereign — level, with local authorities only allowed to run a small shortfall.
Money raised from this source helps fund expenditures across a broad range of areas, including diplomacy, defense, public security, education, science and technology development and commodities reserves. Some 3.34 trillion yuan ($469 billion) in new general sovereign bonds was approved by the NPC for this year.
Any mid-year revision to the budget, which could spur changes in issuance, has to go through either the NPC or its executive body, the Standing Committee. The NPCSC usually meets once every two months, and its next huddle could happen later this month or early November.
In a rare move, the government last October announced the issuance of an additional 1 trillion yuan in these bonds after getting NPCSC approval. This increased the national fiscal deficit to 3.8% of gross domestic product from 3%, and was done to expand public spending and prop up economic growth.
Lan said in his Oct. 12 briefing that the central government has “quite large room” to borrow and raise the deficit. That fueled expectations for an increase in sovereign debt supply. While another mid-year budget revision before December is one option, analysts said the annual legislature’s gathering in March is another window to watch.
China had a total of 30.86 trillion yuan in outstanding sovereign bonds — the vast majority of which is general bonds — as of the end of 2023, or about a quarter of national GDP.
Special Sovereign Bonds
These bonds are sold by the central government to serve specific purposes, and typically aren’t counted in the official fiscal deficit. Prior to this year, they were used on three previous occasions — to raise capital for big state banks during the 1990s Asian financial crisis, to capitalize China’s sovereign wealth fund in 2007 and to pay for fighting Covid in 2020. The debt usually carries a maturity of 10 years or less.
But things changed this year, with the central government starting to take a more prominent role in driving economic growth. That’s because local authorities, which had for many years been the main actors, are now debt-laden and cash-strapped. In March, Beijing said it would sell ultra-long special sovereign bonds for several consecutive years. Some 1 trillion yuan was planned for this year, and 752 billion of that had been issued as of the end of September. No quota for issuance in subsequent years has been announced, although Lan’s briefing fanned speculation that future sales will exceed this year’s size. Tenors of the bonds sold this year ranged from 20 to 50 years.
General Local Bonds
Chinese provinces used to be officially barred from selling bonds on their own, and so depended on off-balance sheet borrowing — especially as local authorities assumed the main role in driving economic growth in the wake of the global financial crisis. Things changed in 2015, when Beijing sought to restrain local financing vehicles and a revised budget law took effect. General local bonds, similar to general sovereign bonds, are included in the nation’s official fiscal deficit.
These bonds are supposed to be used to fund investment in construction projects that are “necessary” and non-profit seeking public initiatives — such as those in the education, health care and environment protection sectors — according to the current Budget Law.
Local governments had 15.87 trillion yuan in general bonds outstanding at the end of 2023 and 680 billion yuan in unspent quota saved from previous years, according to Bloomberg calculations based on Ministry of Finance data. They were allowed to sell another 720 billion yuan in new general bonds to fill the gap between general public income and spending this year.
Special Local Bonds
The finance minister, Lan, referenced these last weekend, revealing there was 2.3 trillion of yuan in such available funds this year that still hadn’t been spent or tapped. That highlights another long-standing problem: Local governments can’t find enough good investments, as the country hits a saturation point in roads and airports.
Special local bonds are viewed as a key tool for spurring growth, and are primarily invested in infrastructure projects such as transportation, energy and industrial parks. A small portion is used to replenish capital at local banks. The bonds are supposed to be repaid by the return on investments, and so aren’t included in the official fiscal deficit.
Provinces had a total of 24.87 trillion yuan of outstanding special local bonds as of the end of 2023. There was around 750 billion yuan from unspent quotas in previous years. Tapping that amount would need the approval of the State Council, China’s cabinet, rather than legislators.
Lan at the briefing said local governments are permitted to use 400 billion yuan in unspent bond quota from previous years to beef up income this year. He didn’t specify whether the bonds are special or general notes, nor did he explain when the move was approved or took effect.
Special local bonds have also been the focus of debt swaps to retire a portion of local government financing vehicle borrowing — known as hidden debt, as it’s off the balance sheet and subject to less transparency.
LGFV debt has been costly to service, particularly for local authorities that have seen their income drop due to the years-long property crisis. The size of the overhang is considerable — LGFVs had 60 trillion yuan of debt as of the end of 2023, according to estimates by the International Monetary Fund.
Lan said the government will give the largest one-off bond quota in recent years for the purpose of debt swaps, to ease local fiscal strains.
--With assistance from Jing Zhao.
(Updates with details on unspent local bond quota.)
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