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China weighs more stimulus with $139 billion of special bonds

The government of the world's number two economy is looking to raise more capital to support its escalating stimulus measures, and one option is to issue new debt worth 1 trillion yuan ($139 billion). This would be the fourth sale of such bonds in the last 26 years.


Those in the know have revealed that senior lawmakers are currently debating a plan to sell ultra-long sovereign bonds to finance urbanization, food, energy, and supply chain initiatives.


These bonds have rarely been sold before: One example is the issuance of special debt by the government to restock capital for large state-owned banks following the 1998 Asian Financial Crisis.


In 2020, the government sold 1 trillion yuan worth of these bonds to fund measures taken in response to a pandemic. This was the most recent sale.


The discussions highlight the administration's attempts under President Xi Jinping to transfer the financial burden of supporting a faltering economy from overburdened provincial and municipal governments to the central government. In the face of persistent deflationary pressures, the continuing property crisis, and poor domestic demand, many economists and investors are calling for additional stimulus to boost activity and confidence.


The strategy could be altered, according to those in the know. The conversations are still underway. A request for comment was not responded to by the Ministry of Finance.


In order to stimulate the economy last year, China also issued more government bonds. If that's the case, Beijing issued extra sovereign debt worth 1 trillion yuan to fund disaster relief and building, taking the unprecedented step of increasing the fiscal deficit ratio for 2023 to nearly 3.8% of GDP.

The proposal for 2024 would utilize special debt instead of the regular budget, which has historically been included in both and has not added to the headline deficit ratio.


Repayment of the revenues will take place over many decades due to the ultra-long bond design, which reduces the urgency of making immediate payments. Those debts were issued at the end of last year and included important tenor bonds with repayment terms of a few years to a decade, which is significantly longer.


Economists at Goldman Sachs Group Inc. identified the issue of ultra-long bonds as a "likely toolkit" for fiscal easing this year, but they acknowledged that these bonds "may not be able to address all the fiscal challenges" in a research note published on Monday.


"We do recognize the uncertainty surrounding the exact combination of government bond issuance ahead, but we believe fiscal support should remain solid this year," they wrote.


According to those in the know, Chinese local governments are currently pitching potential projects. One of them mentioned that the sales are scheduled for the latter part of this year. Recipients are still sorting through around half of the funds set aside for usage at the beginning of 2024 from the additional debt sale that was disclosed in October.


The National People's Congress is a major yearly political gathering that takes place in March.


Economists predict that this year's official budget deficit might be somewhat larger than last year's or slightly smaller. Including the additional debt released in October, one wide measure estimates that the 2023 budget deficit reached 8.7 trillion yuan.


In an interview with official media earlier this month, Finance Minister Lan Fo'an characterized the government's debt ratio as being "in a reasonable range." Officials have been "appropriately expanding spending and meeting realistic needs, while saving room for tackling potential risks and challenges in the future," he continued. A


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