MNI: China To Boost Urban Renewal Funding To Drive Demand

China is expected to direct up to several hundred billion yuan from existing central government funds to accelerate urban renewal projects, supplementing this with local government special bond quotas, while reserving additional resources to support domestic demand in the event of future economic uncertainty, policy advisors told MNI. 

Beijing could direct about CNY50 billion from the CNY735 billion central government investment budget, combined with CNY300-500 billion from this year’s CNY1.3 trillion allotment of ultra-long-term special treasury bonds, toward public welfare projects, especially those with weak profitability, said Zhang Yiqun, director at a fiscal studies institute affiliated with Jilin province’s finance department. 

On local level, a higher special-bond allocation is also expected, which would help leverage private investment weighed down by decreasing income and unstable expectations, Zhang added. 

Special bond financing by local governments for mainly urban village and shantytown renovation totalled around CNY80 billion as of mid-May, data by Financial China Information & Technology showed. This form of low-cost government funding is expected to remain the primary source of investment, given the large scale and long payback periods of such projects, Zhang added.

While government bonds will likely dominate the initial funding stage, additional support from policy-based financial instruments is also anticipated, with the People’s Bank of China likely to direct special loans at policy banks through its pledged supplementary lending tool, according to analysts at China Galaxy Securities.

REPAYMENT RELAXATIONS

The relaxation of local government special bond repayments will also provide greater flexibility and support investment intensity, given the lack of profitable projects, Zhang argued, adding this form of off-budget debt was first designed to be repaid by proceeds from projects it funded.

“Local governments can now service the debt using government subsidies or income from other regional projects,” said Yang Xiaoyi, senior researcher at local government investment advisory firm BRI Data, pointing to a December guideline on improving the management of local special bonds. She estimated less than 10% of 2025’s CNY4.4 trillion in local special bond issuance is likely to be allocated to urban renovation.

However, Zhang emphasised government subsidies will be limited in amount and mostly used to repay interest rather than principal to keep the debt rolling over.

DOMESTIC DEMAND

Authorities would likely continue their “patching up” approach to domestic demand stimulus rather than opt for a major package for now, said Zhang, who remained optimistic the government's 5% GDP growth target was on track.

But both advisors did not rule out additional government bonds in H2 if it felt the growth target was at risk, pointing to the potential for further China-U.S. trade tension. (See MNI: China Sees 10% Tariffs As Realistic, May Offer UST Deal)

More than 60,000 urban renewal projects were undertaken in 2024, attracting investment worth CNY2.9 trillion, according to the Ministry of Housing and Urban-Rural Development.