China Said to Plan New Bond Program to Fund Construction

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China is planning at least 1 trillion yuan ($161 billion) in bonds, and potentially a multiple of that, to fund construction projects that can help address a struggling economy, according to people familiar with the matter.

Unlike the previous leadership’s reliance on a record surge in local government debt to fund the post-2008 stimulus, President Xi Jinping and Premier Li Keqiang’s team will use arms of the central government to raise the money. Local authorities are in the midst of a restructuring of their debt, and their constricted financing has seen infrastructure spending slow.

The construction-bond program is taking shape amid fresh signs that growth is running at less than an official target of about 7 percent for this year. A weakening in manufacturing could be countered by some of the infrastructure projects now envisioned, including shanty town redevelopment.

“We believe the government is preparing a large fiscal stimulus package, without which the economy could be heading for a hard landing worse than that experienced in 2008,” Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, who previously served as a consultant to the central bank, wrote in a note on Monday.

China Development Bank Corp. and the Agricultural Development Bank of China, which are referred to as policy banks because they carry out government objectives, will issue bonds to fund construction, the people said, asking not to be identified because they weren’t authorized to speak publicly about the plan. The Postal Savings Bank of China will buy the debt, aided by liquidity from the central bank, according to one of the people.

Interest Payments

Reuters previously reported the construction-bond plans. A faxed request for comment to the People’s Bank of China wasn’t responded to. The central government will subsidize most of the interest on the securities, the people said.

The roundabout means of financing underscores China’s continued reticence to sell central government bonds to finance spending. The strategy helps keep China’s official debt-to-gross domestic product ratio low, while adding to the burden of the central bank. The PBOC has already been tapped to help with a stock-market bailout to address the equities rout and the restructuring of local-authority borrowing.

Four interest-rate cuts by the PBOC since the start of November, along with reductions to commercial banks’ required reserve ratios, have yet to bolster industries contending with a property-market slowdown. Manufacturing purchasing manager indexes in recent days showed slippage in July.

“Traditional tools are proving to be not so effective,” Huang Wentao, a Beijing-based analyst at China Securities Co., wrote in a note Tuesday. “Commercial banks are reluctant to lend, so policy banks will have to play the role. The arrangement of targeted issuance is aimed at alleviating pressure on the bond market.”

For more, read this QuickTake: China’s Debt Bomb

— With assistance by Steven Yang, and Heng Xie

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