China Local Government Debt Hits Record High Reservation... "Proactive Fiscal Policy"

[Asia Economy Beijing=Special Correspondent Park Sun-mi] As the Chinese government continues to pour money into infrastructure projects to offset the economic shock caused by the novel coronavirus disease (COVID-19), the scale of local government debt this year is expected to inevitably reach a record high.

On the 15th, Hong Kong's South China Morning Post (SCMP) reported that the scale of local government debt in China from January to May is expected to approach a record high of 3 trillion yuan, significantly increasing compared to 1.9 trillion yuan during the same period last year.

The sharp increase in local government debt is due to local governments actively issuing special-purpose bonds for infrastructure construction in line with the central government's policy direction. According to statistics from the Chinese Ministry of Finance, the issuance amount of local government special-purpose bonds from January to April this year exceeded 1.6 trillion yuan. Additionally, on the 11th, an additional issuance quota of 1 trillion yuan for special-purpose bonds was allocated. Premier Li Keqiang has instructed all local governments to fully utilize the allocated quotas by this month.

Special-purpose bonds are mainly issued by local governments to secure large-scale funds for infrastructure facilities such as roads, railways, ports, and airports. The Chinese government first introduced these bonds in 2015. While government-issued general bonds can be repaid through fiscal revenue, special-purpose bonds are used as funds for infrastructure construction and must be repaid with income generated from the infrastructure facilities built by local governments.

At the upcoming Two Sessions next week, China is expected to announce an increase in the quota for local government bond issuance this year, signaling an expansion of special-purpose bond issuance. The scale of local government special-purpose bond issuance was 2.15 trillion yuan last year, but the atmosphere suggests it will rise to at least the 3 trillion yuan level this year. Experts also expect the fiscal deficit ratio relative to the gross domestic product (GDP), which was 2.8% last year, to rise to around 3.5?4% this year.

China has announced plans to implement a more aggressive fiscal policy to overcome the economic shock caused by COVID-19. In an article published yesterday in the People's Daily, Liu Kun, Minister of Finance of China, stated, "This year, we will implement a more proactive fiscal policy" and "improve policy efficiency and the intensity of economic regulation." As specific methods to realize a proactive fiscal policy, he mentioned ▲ raising the fiscal deficit ratio ▲ issuing special national bonds for the 'COVID-19 battle' ▲ expanding the issuance of local government special-purpose bonds.