MNI: Beijing Preps Policy-based Bonds Aimed At Infrastructure

Beijing is preparing to launch a policy-based financial instrument to replenish capital for key infrastructure projects aimed at boosting consumption and strengthening technology capacity, advisors and analysts told MNI, with some estimating an initial scale of CNY500 billion. 

Policy banks would issue bonds primarily to financial institutions, with funds injected into existing or newly established fund companies that would invest in National Development and Reform Commission-approved projects, one advisor told MNI, expecting authorities to launch the program soon. The instruments are somewhat similar to previous iterations, he added.

Several municipal and county-level governments have begun reserving projects for the new tool after proposals were introduced at April’s Politburo meeting, as detailed in public work reports.

Zhang Yiqun, director at a fiscal studies institute under Jilin province’s finance department, agreed that a near-term launch is likely and necessary to support growth in the second half of the year, even though Q2 GDP is expected to remain above Beijing’s 5% target. The initial funding scale should be CNY500 billion, with potential for additional quotas later, Zhang said. 

However, Wei Hongxu, an analyst at think tank ANBOUND argued any additional pro-growth measures, including the launch of such a tool, may be delayed until the end of Q3 or even Q4 due to the relatively smooth economic performance so far this year and uncertainty surrounding China-U.S. trade talks. (See MNI: China Advisors Hopeful Of US Trade Deal By Mid-August)

DIMINISHED IMPACT

“The tool’s multiplier effect may fall below previous endeavors, which generated up to five times the initial capital,” Zhang cautioned, citing a lack of high-return projects and the limited fiscal capacity of local governments to provide matching funds. Still, results could contribute between 0.5-1 percentage points to nationwide fixed-asset investment growth this year, following a slowdown to 3.7% y/y in the January-May period from the previous 4.0%, Zhang added.

The advisor, however, expects the instrument to generate over 10 times the initial investment judging from the previous implementation of similar tools, given the enthusiasm among local governments. “This helps plug gaps in project capital while not establishing management or control over the invested project,” the advisor said.

Wei estimated that CNY500 billion in base capital could leverage between CNY1-5 trillion in investment through a 20% capital ratio and generate around CNY2 trillion in credit demand.

CONSUMPTION FOCUSED

Advisors said, in addition to the previous practice of funding the capital of major national strategy and security-related works, the new tool would also focus on infrastructure projects aligned with the Politburo’s push for technology, innovation, consumption, and stabilising foreign trade.

“The instrument acts like a financial investor with characteristics of patient capital, which not only suits paid-to-use public infrastructure projects with a long payback cycle, but also suitable for supporting industrial or even tech innovation projects with higher risks,” the advisor said.

Wei noted that to support sustainable economic growth, China must balance investment in traditional infrastructure with long-term support for tech and consumer-facing sectors.

Zhang called for a selective approach based on debt sustainability. “Areas such as transportation are saturated with investment, while public facilities, which can boost consumers’ spending power, were in great need,” he said. He pointed to logistical shortfalls in rural areas that hamper online consumption and noted that lower-income households lack access to inclusive elderly care. The People’s Bank of China may also restart its Pledged Supplementary Lending (PSL) program to help policy banks roll out the new tool, with the central government potentially offering interest subsidies, Zhang said.

In June 2022, the State Council introduced a similar policy-based financial instrument to offset the economic impact of the pandemic, initially raising CNY300 billion through bond issuance, with the quota later expanded to CNY740 billion.