China keeps $638.3B special bond quota for local projects

China will maintain its local government special bond issuance quota at a substantial CNY4.4 trillion (USD638.3 billion) for the current year. The funds will be used to support infrastructure projects, replace hidden local debt, and cover overdue payments owed to businesses.

This plan was outlined in the government work report presented at the opening session of the 14th National People’s Congress. Keeping the quota consistent with last year highlights Beijing’s ongoing strategy to rely heavily on special bonds as a crucial fiscal policy instrument to bolster investment and promote economic stability.

Originally, local government special bonds were created to finance public welfare projects that generate revenue, with repayments funded through government allocations or project income. Recently, a portion of these bonds has also been authorized for replacing implicit local debts and settling dues owed to enterprises. Managed within the government funds budget, these bonds are excluded from the overall fiscal deficit.

In response to the economic slowdown, the issuance amount for special bonds has become a key indicator of the government’s proactive fiscal stance. The issuance began in 2015 with an initial quota of CNY100 billion (USD14.5 billion). Since then, the limit has surged, reaching CNY4.4 trillion last year and holding steady this year.

To expedite infrastructure development financed by these bonds, the finance department allocated part of the current year’s quota to local governments early last year, enabling bond issuance to commence in early January. By the end of February, local authorities had issued CNY2.28 trillion in special bonds, approximately 22% higher than the same period last year.

Last year, local governments issued a total of about CNY10.31 trillion (USD1.49 trillion) in bonds, which includes roughly CNY5.38 trillion of newly issued bonds and CNY4.93 trillion in refinancing bonds used to repay maturing debts, according to data from the finance ministry released earlier this month.

Among the new bonds, CNY4.61 trillion were special bonds, and CNY774 billion were general bonds. By utilizing leftover quotas from previous years, the actual special bond issuance exceeded the annual limit by CNY210 billion.

General bonds issued by local governments are intended for non-profit public welfare projects and are repaid from the revenue of the public budget. These bonds are integrated into the management of the broader public finance system.

The total local government debt reached approximately CNY54.82 trillion at the end of last year, marking an increase of about CNY7.29 trillion, or 15%, from the previous year. Nonetheless, this remains below the cap of around CNY57.99 trillion set by the legislative body, indicating that local debt risks are generally manageable, according to finance ministry reports.