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China Announces $138 Billion Special Sovereign Bond Sale to Address Economic Challenges

China launches $138 billion bond sale to address economic challenges, with speculation on aiding the troubled real estate sector.

By Athena Xu

5/16, 16:14 EDT

Key Takeaway

  • China announces a $138 billion special sovereign bond sale, the fourth in 26 years, aimed at addressing economic challenges.
  • Speculation arises that funds may support the troubled property sector amid efforts to stimulate domestic demand and reduce housing stock.
  • Strong demand expected for the bonds, with potential fiscal measures to ease real estate crisis boosting investor sentiment in property stocks.

Special Sovereign Bonds Sale

China has announced the sale of 1 trillion yuan ($138 billion) in special sovereign bonds, marking the fourth such issuance in the past 26 years. These bonds are unique as they are not included in the fiscal deficit and can be utilized for any governmental purpose, demonstrating their strategic importance. Previous issuances funded significant initiatives, including the recapitalization of state-owned banks in 1998, the seeding of the nation’s sovereign wealth fund in 2007, and Covid-19 control measures in 2020. The decision to issue these bonds again underscores a sense of urgency within China's political leadership to address current economic challenges.

Market Speculation and Economic Stimulus

The bond sale has sparked widespread speculation regarding its potential impact on China's economy, particularly the troubled property sector. The Politburo's recent call for measures to reduce housing stock has fueled expectations that a significant portion of the proceeds may be directed towards alleviating excess supply in real estate. However, official statements have been vague, with President Xi Jinping's references to “new productive forces” suggesting a broader use of funds. Despite this, the government's acknowledgment of the need to stimulate domestic demand has led some to speculate that the real estate sector may still benefit, given its significant role in the Chinese economy.

Demand and Market Dynamics

The bond issuance is expected to see strong demand, with thirty-year yields decreasing slightly since the announcement. The People's Bank of China's (PBOC) maintenance of a policy loan rate at 2.5% and the rolling over of 125 billion yuan through its medium-term lending facility indicate a supportive monetary environment. Additionally, the inclusion of ultra-long tenors in the bond sale has attracted attention to China’s longer-maturity debt. Analysts predict that the increased supply of bonds may challenge the ongoing bond rally but do not foresee significant spikes in yields due to high demand from domestic institutions.

Real Estate Crisis and Fiscal Support

Amidst efforts to stimulate the economy, China is considering proposals to address the real estate downturn, including having local governments purchase unsold homes from distressed developers. This plan aims to convert these properties into affordable housing, potentially easing the property market's challenges. The announcement of such measures has already positively impacted investor sentiment, as evidenced by a rally in Chinese property stocks. However, concerns remain regarding the financial strain on local governments and banks, with some expecting a required reserve ratio cut by the PBOC in the coming month.