A rush of interest in China’s rarely offered ultra-long-term special government bonds appears to reflect investors’ appetite for safe-haven assets as they hunker down amid uncertain economic times.
Meanwhile, local-level governments, having become awash in growing debt pressure, are vowing to fight for a piece of what is ultimately a relatively small pie that will be used to feed economy-boosting projects across the country.
The appeal of these special long-term treasury bonds – part of a trillion-yuan (US$138 billion) offering of such bonds planned for this year – is so great that when the first batch of 30-year bonds began trading on Wednesday, the value surged by more than 20 per cent in both the Shanghai and Shenzhen stock exchanges, triggering temporary suspensions.
The trading of the ultra-long special treasury bonds came after Beijing rolled out new property-support measures, with the People’s Bank of China facilitating 1 trillion yuan in extra funding and easing mortgage rules. Local governments have been asked to purchase unsold homes from developers and convert them into affordable housing.
Analysts say that the acceleration of government bond issuances could help stabilise credit growth, which also slowed sharply in April.
Daniel Duan, who works with high-net-worth individuals at a commercial bank’s private banking department in Shenzhen, said that some of his clients have moved their deposits into ultra-long treasury bonds.
“Bank interest rates are low, and government bond interest rates are high [in comparison]. There is no need for banks to make loans,” Duan said. “Bank deposits are falling, bank loans are falling, so basically the size of bank [assets] is shrinking.”
Classifying these expenditures as special treasury bonds … will make it challenging to specify the exact use of the funds
This is not the first time that the Ministry of Finance has sold ultra-long treasury bonds. It also did so in 1998, 2007 and 2020. But unlike in previous issuances, this time around the proceeds of 1 trillion yuan will be divided equally between the central government and local governments.
So, local authorities will be hoping to secure a portion of the 500 billion yuan that will be made available to them for suitable projects. But therein also lies uncertainty. While Premier Li Qiang has said the bonds will advance China’s modernisation drive and promote high-quality development, the exact use of the funds has yet to be confirmed.
And the entire 1 trillion yuan worth of funds raised under the new arrangements will be off-budget. As such, while their issuance will lead to an overall increase in official government debt, it will not be reflected in the official fiscal deficit. Beijing has set its deficit-to-GDP ratio at 3 per cent for 2024, with the government deficit set to rise by 180 billion yuan from 2023.
Former finance minister Lou Jiwei raised transparency concerns over the special bonds during a speech at the China Europe International Business School on March 29.
“Incorporating an additional 1-trillion-yuan deficit into the government budget would have enhanced the transparency of fund usage. However, classifying these expenditures as special treasury bonds, which are managed under the government-run fund budget, will make it challenging to specify the exact use of the funds,” Lou said, according to a transcript posted on the business school’s social WeChat account on May 9.
04:49
Anger mounts as China's property debt crisis leaves flats unfinished
Anger mounts as China's property debt crisis leaves flats unfinished
A combination of low interest rates and a prolonged property-market downturn has prompted some investors – including some smaller Chinese banks – to ignore duration risks by snapping up longer-term bonds, sending their yields to record lows in recent months.
“For institution investors, you get more than 2.5 per cent every year [in interest] on a sovereign credit, which is not bad – for 30 years, too,” said an investment banker from Guangzhou who declined to be identified.
The Ministry of Finance sold the first batch – totalling 40 billion yuan – of the new special treasury bonds at an average yield of 2.57 per cent following an auction, which offer interest to bondholders every six months until the bonds mature on May 20, 2054.
The second batch of such bonds was issued on Friday. State broadcaster CCTV reported that the 40-billion-yuan sale of 20-year bonds was priced at 2.49 per cent and will be listed on May 29.
Annie Chen, a financial consultant at a private banking firm in Shenzhen, who serves high-net-worth clients, said most interest in the first batch is likely to be from institutional investors, which invest funds on behalf of clients or members. Non-professional retail investors, she said, tend to prefer stocks and funds.
“This means that these institutions expect interest rates to decline in the long term,” Chen said, adding that investors in ultra-long bonds are likely to be more conservative. “It may be that they have relatively large amounts of assets and currently do not see good investment channels, so they will allocate a certain amount in the ultra-long treasury bonds.”
After a surprise upturn in economic growth in the first quarter this year, key data in April showed domestic demand faltering and a property-price decline worsening despite a jump in industrial activities.
When discussing the special ultra-long bonds while delivering his government work report to China’s top legislature in March, Premier Li said the issuance of such bonds may continue in years to come. And some proceeds will be invested in national strategies and areas related to national security.
Citing sources familiar with this year’s trillion-yuan offering of special long-term bonds, Reuters has reported that the Ministry of Finance will sell 300 billion yuan worth of 20-year bonds, 600 billion yuan worth of 30-year bonds and 100 billion yuan worth of 50-year bonds.
Li Chao, a spokeswoman with China’s top economic planner, the National Development and Reform Commission, said during a regular press briefing on Monday that the NDRC had been working closely with local governments and ministries to “sort out and prepare projects” for the special bonds.
“These major projects are those that can be invested immediately,” Li Chao said. “And once the funds are in place, construction can be accelerated.”
The eastern coastal province of Zhejiang is among those that have publicly said they will campaign hard for a share of the proceeds.
Pan Yigang, vice-president of the Zhejiang Development and Planning Institute, a governmental think tank, said in a front-page report by Zhejiang Daily on May 19 that the special treasury bonds presented an opportunity for local governments to invest in projects that they would not normally have the means to kick-start.
“Especially when it comes to some projects in the field of public services – such as renovations of workers’ homes – the earlier the construction can start, the better the effect will be,” Pan told the state-run publication. “But due to funding issues, such projects may never be funded. The ultra-long special treasury bonds can change that.”
