Five Things to Know About China’s Unusual Sovereign Bond Issue

Proceeds from the 1 trillion yuan sale will be transferred to local authorities, although the central government will be responsible for the principal and interest payments, easing financial pressure

The Chinese government took a rare and unexpected decision in October to issue 1 trillion yuan ($141 billion) of additional sovereign bonds in the fourth quarter to finance infrastructure spending, widening the budget deficit as a percentage of GDP for 2023 to a record high of 3.8%.

The announcement, which surprised economists and investors, has fueled debate about whether this heralds a change in the leadership’s approach to fiscal policy. Some analysts say the move suggests top policymakers have accepted that larger annual budget deficits as a percentage of GDP will be needed in future, and that the central government will need to take a larger share of the fiscal spending burden to alleviate pressure on cash-strapped local authorities.

The State Council’s proposals won approval from the Standing Committee of the National People’s Congress (NPC), China’s top legislature, on Oct. 24. The funds raised will be passed on to local governments through transfer payments, and the central government will assume responsibility for repaying the principal and interest. Half of the proceeds, 500 billion yuan, will be allocated this year and half will be carried over into 2024.

The National Development and Reform Commission (NDRC) and the Ministry of Finance, along with other related departments, have established a working mechanism for the special treasury bonds, state broadcaster CCTV reported last week, citing a representative of the ministry. This will involve project reviews and budget allocation.

Here are five things you need to know about the additional government bond issuance.