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China to Issue 1 Trillion Yuan in Special Sovereign Bonds Amid Economic Stimulus Efforts

China to Issue 1 Trillion Yuan in Special Sovereign Bonds Amid Economic Stimulus Efforts, Eyeing Strong Market Demand

By Mackenzie Crow

5/16, 06:09 EDT

Key Takeaway

  • China's Finance Ministry to issue 1 trillion yuan in special sovereign bonds, signaling strong market demand and economic stimulus efforts.
  • The bond issuance aims to support a 5% annual growth target amidst a property downturn, with high domestic institution interest expected.
  • PBOC maintains policy loan rate at 2.5%, alongside plans for $138 billion in fiscal stimulus and proposals to address the real estate crisis.

Solid Demand for Sovereign Bonds

China's financial markets are poised for the first issuance of this year's special sovereign bonds, with expectations of strong demand. The Finance Ministry's announcement to sell 1 trillion yuan ($139 billion) of ultra-long debt over approximately six months, starting with a 40 billion yuan auction, has led to a slight decrease in thirty-year yields. Interest-rate swaps, a measure of short-term borrowing cost expectations, have also dipped to a four-year low, signaling positive market sentiment. Albert Leung, a strategist at Nomura International, commented on the abundant liquidity in banks, predicting good demand for the auction. The bond issuance is seen as a gauge of debt demand amidst fluctuating market sentiment, balancing between hopes for further monetary easing by the People’s Bank of China and concerns over low yields.

Economic Stimulus Measures

The issuance of special sovereign bonds is part of China's broader strategy to stimulate its economy, which has been impacted by a property downturn and weak business confidence. This fiscal stimulus aims to support the government's ambitious annual growth target of about 5%. It marks the fourth instance in 26 years that China has resorted to this type of debt to spur spending. The bond sales are expected to draw more attention to China’s longer-maturity debt, with the pipeline including 20-year, 30-year, and 50-year tenors. Qi Sheng, an analyst at Orient Securities Co., believes that while the increased debt supply may challenge the bond rally, significant spikes in yields are unlikely due to high demand from domestic institutions.

Banking Sector and Fiscal Support

In a move to support economic recovery and stabilize the yuan amidst capital outflows, the People’s Bank of China (PBOC) has maintained its policy loan rate at 2.5%, rolling over 125 billion yuan through its medium-term lending facility. This decision reflects a balanced approach to managing liquidity and economic stabilization. Additionally, China plans to issue $138 billion in special government bonds as part of its fiscal stimulus efforts, aiming to boost economic growth. The Industrial & Commercial Bank of China Ltd. (ICBC) and Bank of China Ltd. (BOC) are also set to issue 60 billion yuan in total loss-absorbing capacity (TLAC) bonds, strengthening their capital bases to meet global standards and support the economy.

Addressing the Real Estate Crisis

China is considering a proposal to have local governments purchase millions of unsold homes to tackle the real estate crisis, potentially converting them into affordable housing. This plan, which is still under review, aims to alleviate the downturn in the property market by acquiring homes from distressed developers. The announcement of this proposal has led to a 14% rally in Chinese property stocks, reflecting investor optimism despite concerns over the financial strain on local governments and banks. The real estate sector's challenges, compounded by significant capital outflows and liquidity concerns, have prompted expectations of a required reserve ratio cut by the People's Bank of China next month.

Street Views

  • Albert Leung, Nomura International (Bullish on China's special sovereign bonds):

    "These days banks still have too much idle cash and liquidity is flush, so I presume the auction will see good demand."

  • Ju Wang, BNP Paribas SA (Bullish on China's bond market):

    "The market will be able to absorb this issuance sufficiently well... There’s a shortage of investible assets due to weak credit demand and the central bank is seen ensuring interbank liquidity will stay loose."

  • Qi Sheng, Orient Securities Co. (Neutral on China's bond rally):

    "Rising debt supply as special bond issuance begins will make it harder for China’s bond rally to extend, but yields are not too likely to spike significantly either... Sovereign bonds are still in large demand by domestic institutions."