China’s Ministry of Finance announced plans on May 13 to issue ultra-long-term special treasury bonds starting this year, with an initial issuance of 1 trillion yuan ($138 billion). Chinese state media reported that the funds would address local government financial difficulties and ensure their expenditures.
This year’s ultra-long-term sovereign bonds have terms of 20, 30, and 50 years. During the Chinese Communist Party’s (CCP) “Two Sessions” in March, Premier Li Qiang stated that such bonds would be issued annually for several years, highlighting the long durations and the unprecedented 50-year repayment period.
Local Government Deficit
U.S.-based Chinese economist Li Hengqing told The Epoch Times that the 1 trillion yuan sovereign bonds would not significantly impact China’s dire economic situation. He said that the main purpose of issuing these bonds is to sustain the basic operations of local governments.“The pace of China’s economic downturn is astonishingly fast,” he said. “Various measures over the past two to three years have failed to improve the situation. From the central to local governments, revenue sources are nearly exhausted, especially for local governments, where land sales account for 30 to 40 percent of their revenue. With the real estate bubble burst, many local governments cannot even pay salaries [for government employees]. The 1 trillion yuan bond issuance is primarily for paying salaries.”
Mike Sun, a North American investment strategist, also questioned whether bond issuance would stimulate the economy. He told The Epoch Times, “Issuing ultra-long-term bonds of 20, 30, or even 50 years is unprecedented. Over the next few years, this will become financial support for local government operations, making ultra-long-term bond issuance a norm.”
Mr. Sun explained that since the CCP’s housing reform policy in 1999, local governments’ primary revenue has been land sales, known as land finance. Land finance ended as the real estate sector fell into turmoil, leaving a huge deficit in local government revenue and spending. Now, they have to rely on debt issuance to sustain local government operations, and this reliance will likely continue for several years.
Regarding the issuance of ultra-long-term bonds, the CCP’s state-owned Economic Daily published an article on May 13, stating that the economy still faces many problems and challenges, particularly insufficient demand, significant pressure on business operations, and numerous risks in key areas. The article emphasized the need to fully and effectively use policy tools, especially the early issuance of ultra-long-term special treasury bonds.
Buying Time
The ultra-long-term bonds, with repayment periods of up to 50 years, have drawn significant attention from experts. American economist Davy Jun Huang told The Epoch Times that local government debt in China is enormous, creating an unprecedented financial predicament. The CCP aims to use ultra-long-term bonds as a time-buying strategy to have the Chinese public cover the astronomical local government debt, he explained.“The exact figure of [China’s] local government debt is a closely guarded secret,” he said. “Goldman Sachs estimates it at over 90 trillion yuan ($12.5 trillion), while Treasury Secretary Janet Yellen estimates it at over 60 trillion yuan ($8.3 trillion). The CCP claims it is between 30-40 trillion yuan (US$4.2-5.5 trillion).”
Mr. Huang questioned the CCP’s ability to pay off local government debts. He explained that currently, about 10-20 trillion yuan ($1.4-2.8 trillion) of debt needs repayment. He predicted that the CCP would issue around 12 trillion yuan ($1.7 trillion) annually for five years to repay the estimated 60 trillion yuan debt.
Billing the Chinese Public
The issuance schedule for this year’s ultra-long-term special treasury bonds is as follows: 30-year bonds on May 17, 20-year bonds on May 24, and 50-year bonds on June 14. The 20-year bonds will be issued in three to four batches, the 30-year bonds in three batches with four issuances each, and the 50-year bonds in one batch with three issuances.Notably, the 600 billion yuan ($83.03 billion) of 30-year bonds will be issued from May 17 to Nov. 15, taking about six months over 12 issuances.
Mr. Li said the 600 billion yuan makes up a large portion of this year’s ultra-long-term bonds, with the lengthy issuance period aimed at mitigating market liquidity impact and gradually spreading the cost to the public.
“Chinese bank data shows individual deposits total nearly 150 trillion ($20.8 trillion). The CCP urgently wants the public to buy these bonds. If sales are poor, they might turn them into ‘patriotic bonds,’ forcing citizens, businesses, and the wealthy to buy them,” he added.
According to a report by China’s central bank for the first quarter of 2024, China’s loan balance is nearly 250 trillion yuan ($24.6 trillion), with deposits close to 300 trillion yuan ($41.52). As of the end of March, out of the total deposits, households account for 49 percent, businesses 27 percent, and the government 14 percent, compared to 2019 pre-pandemic levels with respective changes of +7.1 percent, -4.2 percent, and -3.3 percent.
The report also noted an increasing trend of fixed-term over current deposits, with the ratio changing from a 6 to 4 split in 2017 to a 7 to 3 split currently, indicating that household consumption and overall demand remain insufficient, with deposits primarily remaining within the household sector without transitioning into spending.
Mr. Li said the CCP hopes the Chinese public would use their unspent savings to buy bonds, aligning with the regime’s intentions to invest or alleviate debt. However, in the current political and economic turmoil, issuing 20, 30, or even 50-year bonds suggests the CCP has no intention of repaying the principal. There is also no guarantee that the regime will remain stable during this period.
Mr. Huang warned that the promotion of these ultra-long-term bonds may not be well-received by the market. If the response is lukewarm, China’s central bank might have to intervene, essentially printing more money, which could exacerbate the negative impact on the yuan and potentially lead to hyperinflation.
