China Expands Local Bond Funding to Boost Non-Real Estate Growth
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China is broadening the use of special bond funding by local governments to stimulate economic growth beyond the struggling property market, reports Nikkei Asia. The State Council, China's cabinet, announced on Wednesday that proceeds from special bond issues can now be used for a wider range of projects, including those in emerging industries like new materials, drones, air taxis, quantum technology, cloud computing, and the industrial internet.
The move aims to diversify China's economy and foster innovation in key sectors. Infrastructure projects related to healthcare, elderly care, and childcare are also eligible for bond funding, reflecting the government's focus on addressing China's aging population and shrinking workforce.
The government has increased the maximum portion of a project's capital that can be covered by special bonds from 25% to 30%. However, it has also introduced a "negative list" prohibiting spending on projects that do not generate revenue, such as Communist Party offices and large sculptures. Real estate development is also banned, although purchasing land reserves remains permissible.
The National People's Congress has allocated a 3.9 trillion yuan ($534.4 billion) quota for local government special bond issuance in 2024. The government has indicated that bond issuance will increase in 2025.
Naoto Saito, head of economic research at Daiwa Institute of Research, suggests that these changes could enhance the effectiveness of local government spending. "The remaining issue is how to channel these funds not only to state-owned enterprises but also to private enterprises, which has not been specified," Saito noted to Nikkei.
Beijing's efforts to reshape local government spending come amidst an economic slowdown. While some economists predict a 2025 growth target of "around 5%," they anticipate that actual growth may be lower.
Special bonds and other forms of borrowing, including "hidden debt" incurred by local government-linked investment companies, have played a significant role in China's economic growth through infrastructure investment. However, excessive spending on unprofitable projects has led to mounting debt levels, particularly as land sales, a major source of local government revenue, have weakened.
In November, Beijing approved a 10 trillion yuan debt swap program to restructure the hidden debt accumulated by local governments.
Beyond the bond funding expansion, the State Council announced a streamlined approval process for projects in key economic zones, including Guangdong Province, major cities such as Beijing and Shanghai, and the Xiong'an special economic zone. Projects approved by local governments in these areas will no longer require Finance Ministry audits.