Bloomberg News has a report out today (external link HERE) that China is considering issuing CNY 1 trillion ($139 billion) in special sovereign bonds. First, some quick thoughts on China’s upcoming release of GDP data for Q4 and FY 2023 and economic activity for December, which will come out tonight at 9m ET.
Premier Li Qiang, speaking in Davos on Tuesday, said that China’s GDP grew around 5.2% in 2023, which is in line with consensus estimates. It is unusual for senior officials to front-run an announcement in such specific terms and presumably stems from Li’s desire to set a confident tone for the global audience at Davos. While a 5.2% growth target would allow Beijing to claim victory in meeting its target of “around 5%” in 2023, it is heavily flattered by base effects from 2022’s calamitous zero-Covid economy. Without base effects, underlying growth in Q4 is running at 3-4%.
The Bloomberg Economics team has an interesting take (external link HERE) on Li’s comments, suggesting that a 5.2% GDP growth print would actually be an undercount, and that Beijing is smoothing down Q4 2023 numbers to flatter growth in 2024 – when base effects will be less favorable. That would line up with an observation we made on Friday with the release of credit data for December (link HERE). We noted that while government bond issuance surged in December, government deposits fell by less than the seasonal pattern. It suggests that with China’s 2023 growth target assured, local governments borrowed to fund infrastructure projects but didn’t spend much in December – instead saving this fiscal firepower for Q1.
The December activity coming out tonight will likely show weak growth momentum and even more so anemic private sector demand, such as in retail sales. But the December data largely won’t reflect stimulus in the pipeline, particularly the infrastructure spending that will be rolling out over the course of Q1. The funding is coming not only from local government bond issuance, but also from the central government’s earlier issuance of Treasury bonds announced in October 2023.
Parsing the headlines on special sovereign bonds
The discussion above helps set the context for the Bloomberg News report on the potential for issuance of special sovereign bonds:
China is considering 1 trillion yuan ($139 billion) of new debt issuance under a so-called special sovereign bond plan, only the fourth such sale in the past 26 years, as authorities seek more money to finance intensifying efforts to shore up the world’s second-largest economy.
The proposal under discussion by senior policymakers would involve the sale of ultra-long sovereign bonds to fund projects related to food, energy, supply chains and urbanization, people familiar with the matter said.
Prior sales of such bonds are rare: In the aftermath of the Asian Financial Crisis in 1998, for example, the government issued special debt to replenish capital for major state-owned banks. The most recent sale was in 2020, when authorities issued 1 trillion yuan worth of those bonds to pay for pandemic response measures.
This report is plausible. Beijing is leaning on infrastructure to drive GDP growth this year. If the leadership sets a GDP target of 5% (to be announced at the National People’s Congress in March), as many expect, infrastructure will likely need to grow by double-digits. (I have been leaning towards a more conservative target of “4.5-5%” growth). Because of local governments’ increasingly serious debt burdens, the central government will need to bear more of the burden in funding infrastructure. Beijing already acknowledged that with the unusual late-year decision in October to issue debt and transfer the proceeds to local governments.
Given expectations that Beijing will need to provide significant financial support to local governments again this year, a special sovereign bond wouldn’t be a huge surprise. The reported amount of CNY 1 trillion is 0.8% of GDP, the same amount as the convention bond issuance announced in October – that is, the scale is not enormous. The main differences with a conventional treasury bond are: (1) special sovereign bonds don’t count towards the official budget deficit; (2) the funding is typically long term; and (3) the relatively rare use of these bonds would be meant to convey that Beijing is especially serious about boosting growth.
If the report on special bonds should be confirmed in coming weeks, the main implications would be:
- Reduced risk that infrastructure spending and broader growth slows in H2; local governments’ current funding stream will peter out after Q1, but another surge of central funding would keep it going
- Increased probability that Beijing will set a relatively ambitious growth target of 5% growth this year
The infrastructure support entailed above would be positive for China’s commodity demand and for GDP growth figures, but I wouldn’t overestimate its effectiveness in boosting broader private sector demand and confidence and decisively breaking out of deflation. For example, while infrastructure spending would spur construction activity, offsetting some of the drag from the property sector, construction accounts for only 13% of total employment. This would not be a powerful impulse for reversing weak employment growth, which is one of the key factors holding back household spending and property purchases.
More than any single measure, what would be truly view-changing for the broad economy and market outlook is a sense that fiscal, monetary, property and structural policies are forceful and working together. Beijing has not demonstrated that yet, pledging to boost comprehensive support for the economy but – intent to avoid undisciplined “flood-like stimulus” – still rolling out measures at moderate scale and pace. The most colorful criticism that I have seen for this is the “toilet” metaphor recently employed by Yu Yongding, a prominent economist associated with the Chinese Academy of Social Sciences:
“The current economic policies, including monetary policy, cannot be toothpaste-squeezing… It is like flushing a toilet. It needs to be flushed all at once. If the water is put in little by little, the water will eventually be used up. It doesn’t work.”
The period from now until the National People’s Congress (starts March 5) will see a steady drip of stimulus news and speculation. The key question will be whether Beijing’s support cumulatively represents enough to get the job done.
