China’s local governments are accelerating the pace of borrowing for infrastructure investment, a move that could help lift economic growth while also putting pressure on financial markets.
Provincial governments sold the most amount of special bonds in more than a year this month, according to Bloomberg calculations. And with Beijing setting a September deadline for the regions to issue their remaining allocation for the year, analysts are expecting a boost to debt supply next month.
After a relatively slow start, provinces are now heeding a call made by China’s top leaders at a key July meeting to speed up bond issuance and make use of the funds raised. Beijing is betting that an increase in infrastructure investment would help offset the plunge in property and private business investment, bolstering economic growth.
The tighter liquidity has already contributed to a selloff in one-year sovereign bonds, with yields rising 20 basis points from this month’s low. Money markets are also reflecting the stress, with the seven-day repo rate at more than 40 basis points above the equivalent policy rate — that’s the biggest gap since 2021.
Standard Chartered Plc. analysts forecast the size of the debt-bond swap may be even bigger, possibly in a range of 1.44-2.59 trillion yuan. If it hits the high end of the range, monthly net issuance would be 87% higher than the average seen in the first eight months of 2023, analysts including Becky Liu wrote in a note Tuesday.
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