Bonding With a Purpose
As special bonds are permitted to finance key infrastructure projects, will more capital mean more risks?
By Wang Jun  ·  2019-06-24  ·   Source: NO.26 JUNE 27, 2019
Workers build a road-rail bridge across the Pingtan Straits in southeast China's Fujian Province on June 5 (XINHUA)

The central authorities will allow local governments to issue special bonds to fund qualified major projects, according to a recently issued document. Previously, special local government bonds were only authorized to serve as supporting funds for specified projects.

Infrastructure investment

"To prevent and address local government debt risks, we must solve problems through reform, combining 'further opening the front door' with 'blocking the back door,'" said a press release on the website of the Ministry of Finance (MOF) on June 10. "While strictly controlling hidden local government debts, firmly curbing the increase of these debts and avoiding disorderly borrowing for construction, we will encourage market-based financing for projects in accordance with laws and regulations."

Liu Ping, an analyst with Lianxun Securities Co. Ltd., told Securities Times, "Actually, although the government issued some new policies in July of last year, infrastructure investment hasn't resumed sound growth." According to Liu, there are two reasons for the slow progress of investment in new projects. First, under the pressure of the lifelong accountability for local government debts, government officials are unenthusiastic about initiating new investment projects; and second, previous policies didn't allow borrowed funds to be used as initial capital for projects, so local governments had no adequate funds to start them.

"The new policy will help local governments to activate special bonds already issued," said Liu.

Zhang Yiqun, a researcher on investment and financing with the Society of Public Finance of China, said allowing special bonds to fund qualified major projects concerning public interests is a major readjustment and innovation. This means that in future key investment projects, fiscal and monetary policies will be more closely connected to jointly support the infrastructure investment in the country.

The new policy will improve the efficiency of infrastructure construction, especially key large-scale and high-finance projects, said Zhou Junzhi, an analyst with GF Securities Co. Ltd. In addition, with the initial funds from the issuance of special bonds in place, other debt financing can be started, raising the operational efficiency of the projects.

Investment stimulation

Li Feng, an analyst with Minsheng Securities Co. Ltd., said that in the second half of the year, special bonds may become an important factor in boosting infrastructure growth. From January to May, the amount of newly issued special bonds totaled 859.8 billion yuan ($124.5 billion). While some of the funds were spent on infrastructure-related projects such as tollways, most were used to fund the renovation of shantytowns and increase land reserves.

"If restrictions on special bonds are relaxed, their issuance is expected to stimulate 1 trillion yuan ($145.14 billion) of investment in infrastructure in the second half of the year," Li told Securities Times.

Liu said according to this year's government work report delivered by Premier Li Keqiang in March, the scale of special local government bonds will significantly increase this year, with a plan to reach 2.15 trillion yuan ($312.05 billion), a year-on-year increase of 800 billion yuan ($116.11 billion), in order to support key projects under construction and shore up weak spots in the economy.

Liu estimated that in 2019, about 210-320 billion yuan ($30.47-46.44 billion) of these funds will be invested in infrastructure-related projects, which will stimulate investment in infrastructure by 1.05-1.6 trillion yuan ($152.39-232.22 billion).

Zhang Yu, an analyst with Huachuang Securities Co. Ltd., predicted that about 200-400 billion yuan ($29.03-58.06 billion) of the funds will be used for infrastructure construction, which will contribute 0.2 to 0.4 percentage points to GDP growth. She said that the funds from special bonds alone cannot bring massive infrastructure investment rebound, adding that instead they aim to ensure the smooth implementation of key projects. The new policy is not meant to encourage local governments to increase leverage recklessly; the lifelong accountability system aimed at preventing local officials from accruing mountainous debts will be maintained, Zhang Yu said.

A car travels along the expressway between Tongren, southwest China's Guizhou Province, and Huaihua, central China's Hunan Province, on May 22 (XINHUA)

An eye on risk control

"It should also be recognized that allowing special bonds to fund major local projects will inevitably increase construction and operation risks and repayment pressure. The increase of risks is obvious and unavoidable," Zhang Yiqun warned.

However, the new policy doesn't mean debt risk control will be relaxed. According to the MOF press release, to prevent special bond and related project risks, the government will establish reasonable and clear financial support standards for different types of projects; prohibit repeated increases of leverage of key projects funded by special bonds; strengthen risk assessment to ensure that the financing ability of a project is suited to its debt-paying ability; and strictly manage the funds for repaying debts to ensure that due debts can be redeemed.

The document also stipulated that to control risks, the special bonds should be used only for specific government-invested projects and cannot be used as a source of funds for government investment funds, industrial investment funds or other equity funds. Moreover, repeated expansion of leverage through the setting up of shell companies or multilevel subsidiaries must be avoided.

"The new policy not only has clear requirements on the criteria of the projects, but also prohibits the use of funds beyond stated purposes, with the most important aim of not increasing hidden debts," said Zhang Yijun, deputy head of the research and development department of Golden Credit Rating Co. Ltd., in an interview with China Business News.

"This indicates that the supervising authority will continue its strict oversight of hidden local government debts, so an explosive growth of infrastructure projects stimulated by this new policy will be very unlikely in the future," Zhang Yijun concluded.

Copyedited by Rebeca Toledo

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