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China Launches $138B Bond Sale, Eyes Real Estate Boost

China launches $138 billion special sovereign bond sale, signaling major economic stimulus amid real estate sector speculation.

By Max Weldon

5/16, 21:05 EDT

Key Takeaway

  • China announces a significant sale of 1 trillion yuan ($138 billion) in special sovereign bonds, potentially to support the troubled real estate sector.
  • The bond issuance, expected to see high demand, could challenge the ongoing rally but not significantly spike yields due to strong domestic interest.
  • Speculation arises on using proceeds for economic stimulus, including proposals for local governments to buy unsold homes from developers.

Special Sovereign Bonds Sale

China has embarked on a significant financial maneuver by announcing the sale of 1 trillion yuan ($138 billion) in special sovereign bonds. This move, the fourth of its kind in 26 years, is not accounted for in the fiscal deficit, highlighting its strategic importance for governmental purposes. Historically, such issuances have funded major initiatives, including the recapitalization of state-owned banks, the seeding of the nation's sovereign wealth fund, and Covid-19 control measures. The current issuance reflects the urgency of China's political leadership to tackle pressing economic challenges.

Market Speculation and Economic Stimulus

The announcement has triggered speculation about its potential impact, especially on the troubled property sector. The Politburo's call for measures to reduce housing stock suggests that proceeds might be directed towards the real estate sector, despite official statements being vague. President Xi Jinping's mention of “new productive forces” indicates a broader application of the funds, yet the need to stimulate domestic demand hints at possible benefits for the real estate sector, given its significant role in the Chinese economy.

Demand and Market Dynamics

The bond issuance is anticipated to attract strong demand, with thirty-year yields slightly decreasing post-announcement. The People's Bank of China (PBOC) has maintained a supportive monetary environment, keeping the policy loan rate at 2.5% and rolling over 125 billion yuan through its medium-term lending facility. The inclusion of ultra-long tenors in the bond sale has piqued interest in China’s longer-maturity debt. Analysts believe the increased supply of bonds may challenge the ongoing bond rally but do not expect significant spikes in yields due to high demand from domestic institutions.

Real Estate Crisis and Fiscal Support

In response to the economic downturn, China is considering proposals to address the real estate crisis, including having local governments purchase unsold homes from distressed developers for conversion into affordable housing. This plan aims to ease the property market's challenges and has already positively impacted investor sentiment, as evidenced by a rally in Chinese property stocks. However, concerns about the financial strain on local governments and banks persist, with some expecting a required reserve ratio cut by the PBOC in the coming month.