[NEW YORK] China ramped up debt issuance this quarter, a move that both signals authorities’ priority on stimulating growth and efforts to prevent a repeat of an overheated bond market.
The finance ministry has raised a net 1.45 trillion yuan (S$268 billion) via sovereign notes so far this year, triple the amount for the same period a year ago and marking a record for any first quarter, according to Bloomberg calculations of official data.
The spike in debt financing underscores Beijing’s urgency to expand fiscal spending to cope with housing woes, deflationary pressures and trade tensions. Meanwhile, it also helps to take more heat off a bond market whose stunning rally last year raised concerns about long-term financial risks.
“The reason for faster government bond issuance is the need to raise funds earlier and speed up fiscal spending to counter the impact of tariff policies in the second quarter,” said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group. “That could push the yield curve higher given the debt supply, but the risks are relatively controllable.”
Beijing’s debt binge comes at a time when the outlook for the world’s No 2 economy remains murky, following a mixed bag of data that showed consensus-beating industrial output and investment but persistently weak property sales and loan demand. US President Donald Trump’s fresh tariffs on Chinese goods are adding to uncertainties.
In response, Chinese policymakers planned to boost the supply of new government bonds to 11.86 trillion yuan this year, after raising the budget deficit target to around 4 per cent of GDP, the highest level in more than three decades.
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The supply pressure and a pivot of funds into Chinese tech stocks have helped trigger a sell-off in bonds since early February. The People’s Bank of China (PBOC) has also tightened liquidity to support its currency, leading to higher bond yields.
The yield on the country’s benchmark 10-year sovereign bond stood at just below 1.8 per cent on Wednesday (Mar 26), up from the record low of around 1.6 per cent in early February.
“In the short term the market may be concerned about the disruption brought by an expanded sovereign bond issuance,” said Zhou Guannan, chief fixed-income analyst at Huachuang Securities, but adding that the impact will be controllable given the PBOC will coordinate by keeping liquidity ample.
However, the PBOC has now resumed pumping cash into the financial system, signalling an intention to strike a balance between facilitating growth and containing market risks.
ANZ’s Xing expects the 10-year yield at 1.7 to 1.9 per cent by the end of the second quarter, while Huachuang’s Zhou sees it capped around 2 per cent this year. BLOOMBERG
