According to data from Qiye Yujingtong, local governments across China issued 804.7 billion yuan in bonds in May. This total comprised 160.8 billion yuan in new special-purpose bonds, 245.7 billion yuan in refinancing special bonds designated for replacing existing implicit debt, and 372.8 billion yuan in refinancing bonds used to repay maturing local government debt.
Annual Issuance Progress
Looking at the cumulative data for the year to date, the issuance of bonds aimed at debt resolution is progressing swiftly. From January to May, approximately 1.42 trillion yuan in refinancing special bonds for replacing implicit debt has been issued, accounting for over 70% of the annual quota. In contrast, the issuance of new special-purpose bonds, primarily intended for funding construction projects, is lagging behind the expected timeline. The cumulative issuance for the first five months stands near 1.5 trillion yuan, representing only 34% of the annual quota, which is slightly slower than the sequential pace.
Impact on Infrastructure Investment
Infrastructure investment growth saw a deceleration in April, with some analysts attributing this partly to a slowdown in new special bond issuance that month. The issuance volume for these bonds further declined in May, raising questions about its potential drag on infrastructure investment growth, though the answer is not straightforward.
Reasons for the Slowdown
From January to April, national fixed-asset investment fell by 1.6% year-on-year, while infrastructure investment grew by 4.3%. This highlights the crucial role of infrastructure investment in stabilizing overall investment. However, the growth rate for infrastructure investment from January to April was 4.6 percentage points lower than the rate for January to March.
The slowdown in April's infrastructure investment growth is linked by some analysts to the reduced pace of new special bond issuance. Indeed, April's issuance of approximately 174.4 billion yuan marked a significant drop from the average monthly pace of around 380 billion yuan in the first quarter. May's issuance of 160.8 billion yuan represented a further slight decline.
Expert Analysis on Issuance Tempo
Luo Zhiheng, Chief Economist at Yuekai Securities, noted that fiscal policy this year has been front-loaded, with government bonds, especially new special bonds, being issued early. First-quarter issuance accounted for 26% of the annual total, providing funding support for stabilizing growth and expanding investment. The slowdown in April and May represents a normal adjustment in the issuance rhythm. Additionally, it may be related to fluctuations in project pipeline preparation and approval processes following the concentrated issuance in the first quarter.
Nevertheless, the cumulative issuance progress of about 34% for the first five months remains at a relatively fast pace compared to recent years.
Wen Laicheng, a professor at the Central University of Finance and Economics, suggested that the slowdown in special bond issuance during April and May could be due to insufficient project preparation and reserves at the local level. This year, the pilot program for local governments to "self-review and self-issue" special bonds has been expanded to 14 regions. While this shortens the approval process by eliminating the need for review by the National Development and Reform Commission and the Ministry of Finance, some local authorities have adopted stricter internal standards. Projects with inadequate preparatory work, where bond proceeds might sit idle, may not be in a rush for issuance.
Furthermore, after years of special bond issuance, projects that meet the cash flow requirements—specifically, those where returns can cover costs by 1.2 or 1.3 times—are becoming increasingly scarce.
Broader Funding Context
It is important to note that while the monthly issuance volume of new special bonds affects the available funds for infrastructure investment, other factors also play a significant role. These include the net issuance of local government bonds and the issuance of ultra-long-term special treasury bonds.
Net issuance is calculated by subtracting debt repayments from total monthly bond issuance. Although both April and May saw total local government bond issuance around 800 billion yuan, the net issuance figures were 355.2 billion yuan and 531.4 billion yuan, respectively—a difference of about 180 billion yuan. This is because April had a higher volume of maturing bonds, requiring more funds for repayments, which somewhat crowded out capital available for infrastructure investment.
The slowdown in new special bond issuance in April and May is also partly related to the launch of ultra-long-term special treasury bond sales. The issuance of 1.3 trillion yuan in these bonds began in late April and will continue until mid-October. April saw 119 billion yuan issued, followed by 249 billion yuan in May.
Fiscal expenditure in April was somewhat restrained, potentially reserving space for a future acceleration in infrastructure investment. Zhang Jiqiang, Chief Fixed Income Analyst at Huatai Securities, observed that while general public budget revenue continued to improve in April, the year-on-year growth rate of general budget expenditure turned negative. This misalignment between expenditure and revenue rhythms suggests potential for catch-up spending later. The surplus of 510 billion yuan in general public budget revenue over expenditure in April indicates that the current constraint on fiscal stimulus is not a lack of funds, but rather the processes of fund allocation, project execution, and the creation of physical work volumes.
Debt Resolution Bonds Maintain Steady Pace
In contrast to the volatility in new special bond issuance, the progress of bonds for debt resolution has been relatively stable. May saw 245.7 billion yuan in refinancing special bonds issued to replace implicit debt. Although this is lower than the average monthly pace of around 320 billion yuan in the first quarter, it represents an acceleration compared to April.
Cumulative issuance of these debt-resolution refinancing bonds from January to May reached 1.42 trillion yuan, achieving 71% of the full-year quota of 2 trillion yuan.
While policy this year requires raising the proportion of new special bonds used for project construction, a portion of the monthly quota is still allocated to debt resolution. In May, 19.8 billion yuan of new special bonds were used for existing government projects, addressing needs such as repaying implicit debt, settling existing PPP projects, and clearing arrears to enterprises. The cumulative amount used for debt resolution from January to May is approximately 203.3 billion yuan.
Progress on Implicit Debt Resolution
Professor Wen Laicheng pointed out that the central government has set a clear goal to resolve all existing implicit debt by the end of 2028, with local government financing vehicles (LGFVs) required to fully exit by the end of June 2027. Localities are working towards these deadlines. Since last year and into the first half of this year, the issuance and net financing of urban investment bonds have seen negative growth. Against this backdrop of tightened LGFV financing, these entities increasingly rely on government refinancing bonds to service principal and interest on existing debt.
Luo Zhiheng stated that current debt resolution efforts have achieved positive results, with the scale of local implicit debt significantly reduced. With the help of bond swaps, many regions have completed their annual debt resolution tasks ahead of schedule, and some have even achieved "zero" implicit debt. Swapping implicit debt with local government bonds lowers debt costs, extends maturities, and expands local fiscal space. For instance, the average issuance term for special bonds used to swap implicit debt is as long as 19 years.
Given the intensified fiscal revenue-expenditure矛盾 at the local level, there is room to increase support for debt resolution funds to address key issues like overdue payments to enterprises.
Role of Land Reserve Special Bonds
It is noteworthy that land reserve special bonds, a subset of new special bonds, also help alleviate debt pressure on related enterprises by reclaiming idle land. According to Qiye Yujingtong data, in May, regions including Fujian, Hunan, Anhui, and Zhejiang issued 23.3 billion yuan in land reserve special bonds. The cumulative issuance from January to May totaled 160.5 billion yuan.
Specifically, Shanghai, Fujian, Guangdong, and Jiangsu led in issuance volume for the first five months. Shanghai issued 41.4 billion yuan, Fujian 32.8 billion yuan, Guangdong 29.2 billion yuan, and Jiangsu 16 billion yuan.
In Shanghai and Beijing, the proceeds from these bonds are primarily used for new land acquisition and reserves or for urban renewal projects to improve land use efficiency. In provinces like Fujian, Guangdong, Jiangsu, Zhejiang, Sichuan, Anhui, and Hunan, a significant portion of the funds is used to acquire existing idle land, although these regions also allocate some funds for new land reserves.
A review of project information for some May land reserve bonds reveals that when local governments reclaim idle land, the final acquisition price is often lower than the original cost price paid by the landowner or the market appraisal price by third-party institutions. For example, in one central county, an idle plot had an owner's cost of 180 million yuan and a market appraisal of 140 million yuan, but the government's acquisition price via the special bond was 110 million yuan.
Supporting the Property Market
Luo Zhiheng emphasized that land reserve special bonds are an important tool for stabilizing the property market. By reclaiming eligible idle land, the government can help related real estate developers recoup funds, ease cash flow pressure, and create conditions for the property market to bottom out and stabilize. After reclaiming idle land, local governments can make comprehensive plans based on industrial development, urban renewal, and public welfare needs, thereby enhancing overall land use efficiency.
The property market remains in an adjustment phase. While there are positive marginal improvements on the sales side, the investment side overall remains sluggish. Future policies could consider further facilitating reasonable financing channels for developers and increasing efforts to acquire existing housing inventory.
Professor Wen Laicheng noted that using special bonds to acquire idle land and existing housing inventory is a significant policy to support the real estate sector. However, as the market adjustment is ongoing and the timing of a full stabilization remains uncertain, local governments tend to be cautious in reclaiming idle land. When using special bonds for such acquisitions, they must also consider the need for the bonds to be self-repaying. The willingness to reclaim idle land would be higher if land prices are confirmed to have bottomed out.
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