China Aims to Get the Economy Back on Track with $220 Billion Bond Sales

China’s Ministry of Finance is contemplating allowing local governments to sell 1.5 trillion yuan ($220 billion) of special bonds in the second half of this year. It is considered an unprecedented acceleration of infrastructure funding, which is aimed at revitalizing the country’s turbulent economy.

The bond sales would be brought forward from next year’s quota. It would mark the first time the issuance has been accelerated this way, signaling that concerns are growing in Beijing over the state of the country’s economy.

Normally, local governments in China doesn’t start selling debt until Jan. 1, when the new budget year begins. The proposal to adjust that timeline would therefore need to be reviewed by the State Council and might also need approval from the National People’s Congress.

The debt is expected to mostly be used to pay for infrastructure spending. It is a traditional policy that Beijing uses to boost the economy, which is currently hit by Covid lockdowns and a housing slump. The funding would add to 1.1 trillion yuan in new support for infrastructure announced over the past few weeks, as the government tries to get the economy back on track toward achieving its annual growth target of around 5.5%.

Despite being unprecedented, the bond proposal wasn’t entirely unexpected given the fiscal pressures local governments are under. Revenues have sinked because of a housing market slump and tax breaks given to businesses, while at the same time spending on Covid testing and controls are being ramped up.

Still, it remains doubtful whether Beijing can meet its 5.5% GDP growth target this year even if it boosts infrastructure spending. The extra spending could help increase growth in the second half to about 5%, which would still be insufficient to meet the annual target.

Commodity markets rallied on the news Thursday, with copper ending the day 4% higher on the London Metal Exchange. Tin climbed 5.2%, while zinc rose 3.7% and aluminum was up 1.4%.

Beijing had promised an ‘all-out’ infrastructure push to boost the economy in April.

Local governments are under orders to meet their full-year quota for special bond issuance by June and deploy the funds by August. That signals a bigger wave of infrastructure spending ahead.

While the economy has started to rebound from the worst of the lockdowns in April and May, the outlook remains uncertain as Covid infections continue to pop up and restrictions tightened.

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