China fires starting gun on $140bn debt sale to boost economy

Chinese authorities have kicked off plans to sell Rmb1tn ($140bn) of long-dated bonds, as Beijing raises spending to stimulate the economy.

The People’s Bank of China has asked brokers for advice on pricing the sale of the first batch of the sovereign bonds, according to two people who received requests.

China’s government announced plans for the bond sale during the annual session of the country’s legislature in March, saying it would support investment in critical areas and reinforce economic momentum in the second quarter amid a lengthy property crisis.

“The bond sale is a critical part of the concerted efforts to support significant, urgent and challenging projects that are essential for the modernisation of the economy,” Liu Sushe, deputy head of the National Development and Reform Commission, said in a public briefing in mid-April.

“These are all projects that have long been intended but not materialised, and requiring a central level drive.”

The sale comes after China’s regional banks piled into long-dated sovereign bonds in the first quarter of this year — driving the cost of government borrowing to record lows — as they sought a haven from volatility in China’s equity and property markets.

China sold similar long-dated bonds in 2020 when Rmb1tn was raised to try to control the Covid-19 pandemic and boost infrastructure investments. The bonds being sold this time are expected to have even longer maturities, as a way of funding long-term projects while alleviating the debt burden of local governments.

The new bonds differ from normal government bonds in that the money raised is for targeted purposes. This is the fourth round of special sovereign bond issuance, after a sale in 1998 to recapitalise state banks and 2007 to set up its sovereign wealth fund.

The sales are expected to improve liquidity in the market for longer-dated Chinese bonds, which investors have historically tended to hold to maturity.

China is trying to move the economy away from a growth model fuelled by investment in property and infrastructure, which has caused the debts held by local governments to balloon.

The bond sale “comes at a crucial time for China to reshape its debt structure”, said Jameson Zuo, a Hong Kong-based director at CSPI Credit Rating Co, referring to Beijing’s strategy of using more central government borrowing while trying to tackle the mountain of local government debt.

“Compared to a global standard, China still has significant room, potentially trillions of yuan worth of bond issuance over the next five to 10 years, to let the central government take up more leverage and boost investments,” Zuo added.

More long-dated bonds are expected to be issued in subsequent years to strengthen important areas such as food security, energy and the manufacturing supply chain, premier Li Qiang said this year.

The first batch of the new bonds to be issued will be for an amount between Rmb80bn and Rmb100bn, according to two people who received requests from the central bank. Most will have 30-year maturities but there will also be some 50-year bonds, they said.

The finance ministry summoned officials from the country’s top commercial banks to a meeting on Monday to arrange the underwriting of the long-dated bonds, according to an internal notice sent to some banks seen by the Financial Times.

On Monday the ministry of finance said the first bonds would be issued on Friday.

Sale plans have been submitted for review to the state council, China’s cabinet, while the finance ministry and National Development and Reform Commission are also involved in co-ordinating the sale.

The PBoC hinted in April that it would also consider buying these bonds on the secondary market when the time is appropriate, which “will give it better control of interbank rates”, Zhi Xiaojia, head of Asia research at Crédit Agricole, said.

Zhi said investors “should have already fully prepared for the pick-up of government bond supply from late Q2 [second quarter]”, after China’s politburo, its top 24-member decision-making body, said in late April that such a sale should start “as soon as possible” to fund stimulus and boost demand.

The PBoC has repeatedly warned this year of the dangers of crowded trades in long-dated bonds, which could leave smaller banks that piled in to bonds this year more vulnerable to interest rate fluctuations, potentially leading to a Silicon Valley Bank-style meltdown.

China’s 30-year bond yield, which moves inversely to prices, has steadied at about 2.5-2.6 per cent, its lowest level in decades, after a sharp drop from more than 3 per cent last year.

The upcoming issuance of bonds will help meet demand and is likely to support the central bank’s aim of raising long-dated yields moderately, said Ming Ming, chief economist at Citic Securities.

However, CSPI’s Zuo said that yields might remain “steady” even after the bond sale, as a shortage of other investable assets would prompt investors to keep buying sovereign bonds.