Chinese officials are considering a record quota for special local government bonds this year and widening the budget deficit target as they ramp up support for the world’s second-largest economy, according to people familiar with the matter.
(Bloomberg) — Chinese officials are considering a record quota for special local government bonds this year and widening the budget deficit target as they ramp up support for the world’s second-largest economy, according to people familiar with the matter.
The authorities are discussing a special local government bond quota of up to 3.8 trillion yuan ($560 billion), higher than the previous record of 3.75 trillion yuan, said the people, who asked not to be identified because the talks are private.
The annual quota limits the amount of new bond sales that can be sold each year. However, last year was an exception when the actual issuance of special bonds exceeded the original quota because local governments were allowed to tap some of the unused quota from previous years.
Officials are also mulling a deficit target of around 3% of gross domestic product for 2023, the people said. That would be higher than last year’s goal of 2.8%, yet smaller than 3.6% in 2020.
The Ministry of Finance didn’t immediately respond to Bloomberg News’ request for comment.
Beijing has pledged more fiscal and monetary support this year for an economy emerging from three years of Covid restrictions and a property market crisis. Special bonds are a key source of funding for infrastructure, which economists expect will help fuel economic growth of close to 5% or higher this year.
Local governments have already been building up a massive special bond stockpile to invest in infrastructure, with a $2 trillion maturity wall looming in coming years.
At the same time, they’ve come under huge fiscal strain. Revenue from land sales has plummeted, tax breaks were given to businesses to help them cope with the slowdown — while at the same time, local governments have had to boost spending on Covid testing and controls.
Beijing has been using quasi-fiscal measures, such as financing from state policy banks, to help meet the demand for funding of infrastructure projects. Official data released in November showed that 740 billion yuan raised through policy bank financing tools was invested in infrastructure projects.
China’s fiscal shortfall is far bigger than the official deficit would imply. The broad fiscal gap, which includes the budgets for all levels of government, reached a record 7.75 trillion yuan in first 11 months of last year. Beijing had set a target for the official budget deficit for the whole of 2022 at 3.37 trillion yuan.
Government-linked economists have called on Beijing to expand the official budget deficit by selling more general bonds, to ease the debt pressure on local authorities.
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