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China stimulus starts with a bond, not a bang

Beijing’s economic stimulus has finally arrived. China’s Ministry of Finance on Friday will sell 1 trillion yuan, or $138 billion,of ultra-long special sovereign bonds. This paves the way for more policy support to spur ailing credit demand in the world’s second-largest economy.

Recent economic data underscores the urgency for action. The property sector, once a huge driver of economic growth, has yet to find a bottom: prices for new homes across 70 cities declined for a tenth consecutive month, falling 0.6% in April – the fastest month-on-month pace in more than nine years. Annual growth in outstanding total social financing, a broad measure of credit and liquidity in the economy, slowed to a record low of 8.3% in April.

Beijing’s special onshore bonds, the fourth such sale in over two decades, are expected to have maturities between 20 and 50 years and will not be counted towards the official fiscal deficit. Details on how the funds will be deployed have yet to be revealed, some portions will probably go towards buying up unsold homes or supporting strategic sectors, including semiconductors and high-tech manufacturing, and investment projects. Analysts at CreditSights reckon the bonds will be 20 to 40 basis points cheaper than current funding channels.

It marks a fiscal shift of sorts: the central government is expanding its own balance sheet and directly supporting indebted local governments. Moreover, the latter also have a 3.9 trillion yuan annual quota for special bonds, most of it still unused as of April. Combined, total fiscal ammunition this year should surpass 3.2% of GDP, CreditSight analysts estimate.

Other policies are in the pipeline. The State Council will hold a policy briefing on Friday to discuss a joint ministerial task force plan to boost the property sector. The People’s Bank of China is also expected to further ease monetary policy soon. While investors may have been expecting China to unveil a fiscal bazooka, Beijing is just getting started.

Context

China’s Ministry of Finance will start selling 1 trillion yuan ($138 billion) of long-term special government bonds on May 17.
Reuters reported on May 13, citing sources, that the sale will comprise 300 billion yuan of 20-year bonds, 600 billion yuan of 30-year bonds and 100 billion yuan of 50-year bonds.
The finance ministry earlier said 30-year special bonds will be sold in 12 tranches, from May 17 to Nov. 15. It said 20-year bonds will be sold in seven batches beginning May 24, while 50-year bonds will be issued in three tranches from May 17.

Separately, the State Council will hold a meeting on May 17 with senior officials from the housing ministry, financial regulators, local governments and state lenders to discuss plans on ending a property market slump, Bloomberg reported on May 16.
Source: Reuters Breakingviews (Editing by Robyn Mak and Aditya Sriwatsav)

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