Localities get more say with special bonds

41% of funds raised directed toward infrastructure construction projects

China is allowing local governments to invest in more areas with their special-purpose bonds while also simplifying the approval process, which analysts said will help boost domestic demand and support the country's overall growth in the face of persistent global headwinds.

On top of the well-anticipated increase in the fiscal deficit ratio for next year, the world's second-largest economy is likely to scale up the issuance quota for local government special-purpose bonds to form a powerful combination in shoring up economic momentum, they added.

Local governments can direct their special-purpose bonds toward project categories as long as they're not included on a "negative list" compiled by the State Council — the country's Cabinet — the government said in a document on Wednesday.

"This means that local authorities have much greater flexibility in identifying and proposing initiatives that are best suited to their respective regional development needs," said Chen Xing, chief macro analyst at Caitong Securities.

China has put boosting domestic demand as a top priority for its economic work agenda in 2025, due to escalating geopolitical tensions and rising protectionism, while local government special-purpose bonds have grown to serve as a key source of financing to boost effective investment, Chen said.

An analysis of nearly 6,000 special bond issuances between 2017 and 2022, conducted by School of Economics and Management at Tongji University, showed that over 41 percent of funds raised were directed toward infrastructure construction projects.

Now, according to the document, the eligible areas for special-purpose bond financing have been broadened to include infrastructure supporting emerging industries, such as information technology and new materials, dilapidated urban village redevelopment programs, as well as public service facilities like eldercare and childcare infrastructure.

Meanwhile, special-purpose bonds can now make up a greater proportion of a project's overall investment when used as equity capital, up to 30 percent, as outlined in the document.

In 2024, the proportion of special-purpose bonds used as capital investment nationwide stood at a mere 7.6 percent. Even in the Guangxi Zhuang autonomous region, which recorded the highest usage of such bonds as equity capital, the ratio only reached 15.6 percent, said Wu Qiying, an analyst at GF Securities.

By enabling provincial-level governments to allocate a larger share of their special-purpose bonds as project capital, this adjustment will empower them to more effectively channel resources toward their most pressing development priorities, Wu said.

The State Council also asked local governments to expedite the issuance of special-purpose bonds and advance the construction of funded projects.

To this end, 10 provincial-level regions, including Beijing, Shanghai and Guangdong province — along with Xiong'an New Area in Hebei province — will now be allowed to review and approve their projects funded by special-purpose bonds, according to the document.

Prior to the new policy, localities needed to seek approval from the National Development and Reform Commission and the Finance Ministry before selling the bonds.

According to a report by GF Securities, the peak period for special-purpose bond issuances in 2024 occurred during the August-September timeframe. This has resulted in a significant backlog, with over 2.3 trillion yuan ($315.1 billion) worth of special-purpose bonds remaining unutilized as of early October.

The Ministry of Finance allocated 4 trillion yuan in local government special-purpose bonds quota for 2024, including 100 billion yuan carried over from 2023.

In the coming year, local authorities are widely expected to front-load the issuance of the special-purpose bonds to generate economic gains as quickly as possible, setting the stage for a more robust and sustained economic recovery, said Wen Bin, chief economist at China Minsheng Bank.

China is expected to raise the quota for new local government special-purpose bonds to 4.5 trillion yuan in 2025, Wen said, noting the issuance of new special-purpose bonds is delineated within the government-managed funds budget, and not as part of the fiscal deficit.

Therefore, coupled with the increase in the deficit ratio announced during the annual Central Economic Work Conference in mid-December, the new move signals the country's determination to shore up fiscal firepower to stabilize economic growth, Wen added.