China's New Bonds to Fight Climate Impacts, Lift Recovery

New bonds approved by China’s parliament will be used to help rebuild areas hit by flooding this year and improve urban infrastructure to cope with future disasters, China’s state media says.

The size of the new bonds, which total a trillion yuan ($137 billion), gives an indication that senior officials expect climate change to continue to have a significant – and probably increasing – impact on the country, given global warming is slowly intensifying, while it is still commissioning coal-power plants at a frantic pace.

China approved permits for 52 gigawatts of new coal power capacity in the first half of 2023, maintaining its previous record of approving two plants per week, according to the Global Energy Monitor (GEM) and the Centre for Research on Energy and Clean Air (CREA), the South China Morning Post reported in late August.

Flooding from typhoons that rocked parts of the north and eastern coastal regions in July, plus other extreme weather events were estimated to have caused losses of more than $42 billion this year. And the extent of damage from crop and other economic impacts could go higher.

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Bid to reduce local government debt risks

However, other factors, such as China’s weak domestic recovery, massive debt accumulated by local governments, plus the global trade slowdown, and ‘de-coupling’ by Western businesses, mean the additional income will be welcomed by financial policymakers and provincial officials.

China’s parliament also approved a bill to allow local governments to front load part of 2024 local bond quotas.

Local governments had been told to complete the issuance of the 2023 quota of 3.8 trillion yuan in special local bonds by September to fund infrastructure projects.

Vice-finance minister Zhu Zhongming said on Wednesday the new sovereign bonds will help bolster the economic recovery, as well as hiking the central government’s budget deficit.

“After the treasury bond funds are put into use, it will help drive domestic demand and further consolidate the recovery of the economy,” Zhu said at a news conference.

The world’s second-largest economy grew faster than expected in the third quarter, improving the chances that Beijing can meet its growth target of around 5% for 2023.

But economists say the crisis-hit property sector remains a drag on the economy and continues to cloud the growth outlook.

2023 deficit will rise to 3.8% of GDP

The parliament’s move to issue additional bonds is a rare move and will lift China’s 2023 budget deficit to around 3.8% of gross domestic product from an originally set 3% due to the rise in central government debt, state media said.

The proposed increase in bond issuance comes as Beijing prepares to inject a fresh dose of fiscal stimulus to shore up the economic recovery, insiders say, but there are worries reverting to debt-funded stimulus would undermine the move to a consumer-led economic growth model.

Some analysts played down the near-term positive economic impact of the new debt issuance.

“We believe the economic impact of this 1 trillion yuan in additional CGBs (Chinese government bonds) should not be overstated, especially in the near-term,” Ting Lu, chief China economist at Nomura, said in a note.

“Fiscal multiplier effects from spending on water conservancy projects is likely to be rather limited.”

China will reasonably set the pace of bond insurance and match the issuance with spending, Zhu said, adding that authorities will take steps to prevent misuse of bond funds.

The government’s debt level is still within a reasonable range, the minister said, without giving details.

Some policy advisers say the central government has room to spend more as its debt as a share of GDP is just 21%, far lower than 76% for local governments.

Half of the funds raised via the bond issuance will be spent this year and the other half will be used next year, state media said.

Analysts at UBS expect the government to raise its budget deficit and special local bond quotas for 2024, alongside further cuts in interest rates and bank reserve requirement ratios.