(Bloomberg) -- China is allowing local officials to invest in more areas with a key government bond while also simplifying its approval process in a bid to make better use of an important source of public funding to drive the economy.
Local governments can use their special bonds to invest in projects as long as they’re not on a special list published by the cabinet, the government said in a document Wednesday. That list includes projects that don’t generate any returns, government buildings, vanity constructions like giant sculptures and commercial property.
Eleven regions, including some of the biggest provincial economies like Guangdong, will be allowed to approve the projects funded by the bonds. In the past, all localities needed to get approval from the nation’s top economic planning agency and Finance Ministry before selling the bonds.
China’s top leaders have placed boosting domestic demand as their top priority for economic work in 2025 because the robust growth of exports is threatened by a potential second trade war with the US. Government investment remains a key lever to drive growth even after Beijing pledged more focus on consumption because people’s willingness to spend remains sluggish.
The guidelines “increase the bonds’ flexibility and enhance localities’ autonomy and initiative in driving the economy,” said Zhang Yiqun, a member of the Society of Public Finance of China.
Local government special bonds have grown to become a key source of funding for infrastructure projects over the past decade. But regions increasingly struggle to find suitable projects that meet Beijing’s criteria as investment returns decline across the economy. Sales of local government bonds were slow earlier this year, meaning weakened support for growth.
Such bonds are increasingly important in driving investment because debt sold by local government financing vehicles — another key source of infrastructure funding — has declined due to Beijing’s effort to rein in “hidden debt.”
The State Council guidelines allow the bonds to make up a greater proportion of a project’s overall investment when used as equity capital. More areas including infrastructure for emerging industries like information technology and new materials are eligible for investment, as well as other public facilities such as elderly care and childcare infrastructure.
“By expanding the investment scope of special bonds and speeding up their use, the bonds will be more effective in stabilizing economic growth,” Shenwan Hongyuan Group Co. analysts including Zhao Wei wrote in a note Wednesday.
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Local authorities are permitted to use a wider range of income sources to repay bond principal and interest, according to the document. This improves the security of such bonds, and creates room for more issurance in the future, according to a report by GF Securities.
Granting localities the power to approve their own projects would ensure the projects align more closely with the needs of the local economy, Yuan Haixia, executive director of the research institute at China Chengxin International Credit Rating, said prior to the announcement.
Beijing asked the regions to accelerate the setting up of funds to ensure they can repay the bonds, according to the document. The government also vowed to “firmly curb” the misuse of bonds, warning that provinces could lose their approval rights if serious violations are discovered.
--With assistance from Jing Zhao, Douglas Huang and Fran Wang.
(Updates with more details throughout.)
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