China’s new bonds are aimed at helping economic recovery, an official says, as its budget deficit widens

BEIJING, Oct 25 (Reuters) – China’s new government bonds will help shore up the economic recovery, China’s Vice Finance Minister Zhu Zhongming said on Wednesday, as the government’s stepped-up fiscal stimulus sharply widens the budget deficit.

State media reported on Tuesday that China’s top parliament had approved the issuance of 1 trillion yuan ($137 billion) in government bonds to help rebuild areas affected by this year’s floods and improve urban infrastructure to withstand future disasters.

“Once the government bond funds are put into use, it will help stimulate domestic demand and further consolidate the economic recovery,” Zhu said at a news conference.

The world’s second-largest economy grew faster than expected in the third quarter, boosting Beijing’s chances of hitting its growth target of around 5% by 2023. But economists say the crisis-hit real estate sector remains a drag on the economy, clouding growth prospects.

In a rare move, China sharply raised its 2023 budget deficit to about 3.8% of gross domestic product from the original target of 3% as central government debt rose, according to state media.

The proposed increase in bond issuance comes as Beijing prepares to inject a new dose of fiscal stimulus to support the economic recovery, policy insiders say, but there are concerns that a return to debt-financed stimulus will undermine the shift towards consumer-led economic growth. .

Some analysts downplay the short-term positive economic impact of new debt issuance.

“We believe the economic impact of this 1 trillion yuan in additional CGBs (Chinese government bonds) should not be overstated, especially in the near term,” Ting Lu, chief China economist at Nomura, said in a note.

“The fiscal spillover effects from spending on water conservation projects are likely to be rather limited.”

China will reasonably set the pace of bond insurance and match issuance to spending, Zhu said, adding that authorities will take steps to prevent misuse of bond funds.

The government’s debt level is still within a reasonable range, the minister said, without giving details.

Some policy advisers say the central government can spend more because its debt-to-GDP ratio is just 21%, much lower than the 76% for local governments.

According to state media, half of the funds raised through the bond issue will be spent this year and the other half next year.

UBS analysts expect the government to raise the budget deficit and special local bond limits for 2024, combined with further cuts in interest rates and banks’ reserve requirement ratios.

China’s parliament also approved a bill allowing local governments to early use part of their 2024 local bond quotas.

Local governments have been directed to complete the issuance of 3.8 trillion yuan in special local bonds for 2023 by September to finance infrastructure projects.

($1 = 7.3098 Chinese yuan)

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