China kicks off special bond sale as tariffs threaten economy
[NEW YORK] China issued the first batch of special sovereign bonds for the year on Thursday (Apr 24) as part of the stimulus announced by authorities to soften the blow from simmering trade tensions with the US.
The Ministry of Finance issued a three-part special sovereign bonds which had a planned size of 286 billion yuan (S$51.6 billion). The bond sale is to fund the fiscal package approved in March, but unlike sovereign debt, special bonds are issued for specific purposes and are not accounted for in China's record high fiscal deficit target of 4 per cent for the year.
The latest round of issuance comes as Beijing looks to ramp up spending to defend the economy from the onslaught of 145 per cent US tariffs on Chinese goods, which can make Beijing's 5 per cent growth target for 2025 hard to achieve.
'The government is accelerating the pace of fiscal policy support to offset the tariff shock,' said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group. 'We expect a supply peak in the next couple of months and People's Bank of China (PBOC) will keep liquidity steady.'
Thursday's issuance consisted of 165 billion yuan of five-year special bonds for bank capital injection as state-owned banks struggle with thin profit margins amid the economic malaise. China plans to sell a total of 500 billion yuan of such bonds by Jun 4.
The five-year notes were sold at an average yield of 1.45 per cent, according to a trader who bids at the government debt auctions.
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Also on offer on Thursday were 50 billion yuan and 71 billion yuan of 20- and 30-year special bonds, respectively. Those are part of the 1.3 trillion yuan of 20-, 30- and 50-year ultra-long special sovereign notes that will be offered through October.
The total issuance quota of ultra-long special sovereign bonds this year is higher than the one trillion yuan sold last year. Proceeds from the sale will be used for financing consumer goods purchases, building major infrastructure projects and encouraging businesses to update equipment.
The 20-, 30-year notes were priced at 1.98 and 1.88 per cent, respectively, said the trader who isn't allowed to speak publicly. The bid-to-cover ratio for these bonds exceeded three times, in a sign of strong investor demand, the trader said.
The special bond issuance results were in line with market expectations, said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group. 'The government is accelerating the pace of fiscal policy support to offset the tariff shock.'
Despite the impending supply of bonds, the market is showing no signs of stress as some expect the PBOC to cut interest rates or the amount of cash banks must keep in reserve this year to bolster growth. The benchmark 10-year bond yield was just around five basis points shy of a record low touched in February.
China's overnight repo rate hovered around 1.6 per cent on Thursday, the lowest since January, in a sign of ample cash levels to help cushion the increased debt supply.
'We expect a supply peak in the next couple of months and People's Bank of China will keep liquidity steady,' said ANZ's Xing.
The PBOC may use tools such as outright reverse repurchase agreements to manage liquidity, ANZ's Xing said. 'It could also consider resuming buying of government bonds or cutting the required reserve ratio to inject liquidity at proper time.' BLOOMBERG
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