China Prepares $220 Billion Stimulus With Tsunami Of Bond Sales

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by Tyler Durden
Thursday, Jul 07, 2022 - 11:27 AM

Just as we predicted over a year ago, China - which remains painfully limited in how it can kickstart its slowing economy - is preparing for a massive fiscal stimulus in the form of a tidal wave of local government bond sales.

With growth in the world's second-largest economy faltering especially after China's President Xi Jinping made clear weeks ago that "Covid zero" isn't going anywhere,  there is also "chance zero" that Beijing's 2022 growth target of 5.5% will be achieved because of the lingering threat of new lockdowns

China's slowdown recently forced the People's Bank of China to cut key interest rates for long-term loans to cushion the property slump and lockdowns. Meanwhile, as doubts rise that China will rebound like prior economic downturns, policymakers are set for round two of stimulation: an infrastructure splurge. 

Bloomberg reports that China's Ministry of Finance is considering to allow local governments to sell a whopping 1.5 trillion yuan ($220 billion) of "special" local bonds in the year's second half. The people said the bonds would bolster the struggling economy. 

"The bond sales would be brought forward from next year's quota," according to people who asked not to be named because this has yet to be officially announced.

While the issuance of local bonds  - one of the very few places in China's economy where there is excess debt capacity - is nothing new, this would be the first time "the issuance has been fast-tracked in this way, underscoring growing concerns in Beijing over the dire state of the world's second-largest economy ... previously local governments didn't start selling the debt until Jan. 1, when the new budget year begins." 

China is desperate to offset downward pressure on the economy by restoring its old playbook to increase infrastructure spending to cushion the economy in times of economic distress. If the country's legislative body approves the proposal, it would add to the 1.1 trillion yuan ($164 billion) in new support for infrastructure unveiled last month. 

Economists surveyed by Bloomberg forecast the economy will grow around 4.1% this year, missing Beijing's growth target of 5.5%. It appears pulling growth forward is a move by the government to offset the economic slump. 

While it is a normal practice for local governments to make proposals for the next year, that process normally kicks off in the last quarter of each year, one of the people said. Some provinces were told to start new projects when feasible even if the construction was originally scheduled to start next year, one of the people said. -Bloomberg 

Chinese stocks closed green on Thursday. The benchmark CSI 300 Index closed up about half a percent and has surged nearly 19% since finding a low in late April. 

After plunging in recent days, commodities caught a solid bid on expectations China will once again emerges as a major buying force as it prepares to build a whole new batch of ghost cities.