The Chinese Ministry of Finance announced on May 13 that it plans to issue ultra-long-term special government bonds for several years starting this year, with an initial issuance of 1 trillion yuan (approximately 138.5 billion U.S. dollars). State media reported that besides special purposes, the funds will also be used to address the fiscal difficulties of local governments.
Analysts point out that the 1 trillion yuan is like a drop in the bucket given the current economic challenges, mainly aimed at maintaining the basic operations of local governments and is likely to become a regular practice in the coming years. Furthermore, amidst the current political and economic turmoil, the issuance of 20, 30, or even 50-year ultra-long-term government bonds reveals that the Chinese Communist Party (CCP) has no intention of repaying the principal.
This year’s issuance of ultra-long-term special government bonds includes maturities of 20, 30, and 50 years. Premier Li Keqiang of the State Council mentioned during the “Two Sessions” in March that the issuance of ultra-long-term special government bonds will continue for several years starting this year. The focus has shifted to the term “several years” and “ultra-long-term,” with discussions particularly centering around the 50-year repayment period.
Chinese-American economist Li Hengqing expressed to Epoch Times that the 1 trillion yuan will not substantively impact China’s current dire economic situation, emphasizing that the primary purpose of issuing bonds is to support the basic operations of local governments.
“The speed of China’s economic collapse is astonishing. Various means have been tried over the past two to three years, yet there is no improvement. From the central government to local authorities, the CCP’s fiscal revenue sources are basically drying up. Especially for local governments, land finances account for 30-40% of their revenue. After the real estate bubble burst, many local governments are unable to even pay salaries. The 1 trillion yuan in government bonds offers minimal relief to China’s current economic woes, primarily serving to pay the salaries of local government employees,” Li Hengqing stated.
North American investment advisor Mike Sun also questioned the CCP’s claim that bond issuance would stimulate the economy, stating, “The issuance of 20, 30, or even 50-year ultra-long-term government bonds is unprecedented, and in the coming years, this method of issuing bonds will become the mainstay of supporting local government operations, and the issuance of ultra-long-term government bonds will become commonplace.”
Mike Sun elaborated, “Since the implementation of the housing reform policy in 1999, local governments have relied mainly on land sales for their fiscal revenue for over two decades. However, after the real estate sector crisis, the land finance model has reached its limit, leaving local governments with no other significant revenue sources to fill the massive gap, except by issuing bonds to sustain their operations, which will likely be the norm in the next few years.”
Regarding the issuance of ultra-long-term government bonds, an article in the Economic Daily under the State Council of the CCP on May 13 emphasized the ongoing economic challenges China faces, such as inadequate effective demand, significant operational pressures on enterprises, and numerous risks in key areas. The article stressed the importance of using policy tools effectively, especially by issuing and using ultra-long-term special government bonds promptly to accelerate the progress of special bond issuance.
Additionally, the article recognized that many localities are grappling with notable revenue and expenditure discrepancies, asserting that to ensure timely and adequate expenditure in grassroots sectors (localities) for “Three Guarantees” (guaranteeing basic living standards, salary payments, and operation continuity), the Central Committee of the CCP will transfer funds from ultra-long-term government bonds to local governments.
The longest repayment period for the CCP’s ultra-long-term government bonds extends up to 50 years, drawing attention from experts. American economist Huang Dawei stated to Epoch Times that Chinese local government debt is massive, and the fiscal situation is at an unprecedented crisis. The CCP government is attempting to utilize ultra-long-term government bonds as a means of “trading time for space,” shifting the burden of local government astronomical debt onto the shoulders of ordinary citizens.
The exact amount of Chinese local government debt is a closely guarded secret. Huang Dawei mentioned that Goldman Sachs estimated Chinese local government debt to be over 9 trillion yuan (more than 1.25 trillion U.S. dollars). U.S. Treasury Secretary Yellen estimated it to be over 6 trillion yuan (more than 830 billion U.S. dollars), while the CCP claimed it to be around 3 to 4 trillion yuan (approximately 420 to 550 billion U.S. dollars).
“With such a huge debt load, it’s apparent that the CCP government is incapable of repaying it. Currently, there should be over 10 to 20 trillion yuan (roughly 1.4 trillion U.S. dollars to 2.8 trillion U.S. dollars) of debt that needs to be repaid. How will this debt be repaid? I speculate the CCP government will repay it by issuing bonds. It is estimated that they will issue around 1.2 trillion yuan (approximately 170 billion U.S. dollars) annually for five years to repay the massive debt of 6 trillion yuan,” Huang Dawei remarked.
Huang Dawei noted that the issuance of ultra-long-term government bonds by the CCP, spanning 30 or 50 years, is already quite exaggerated, with the 50-year term being particularly rare. This tactic of “trading time for space” to address local government debt issues using ultra-long-term government bonds may not hold much investment value due to the high risk of inflation. Comparing the purchasing power of the Renminbi or U.S. Dollar 50 years ago to now reveals a significant difference in orders of magnitude.
The CCP announced the issuance schedule for this year’s ultra-long-term special government bonds, with the issuance of 30-year ultra-long-term special government bonds on May 17, 20-year bonds on May 24, and 50-year bonds on June 14. Among them, the 20-year ultra-long-term special government bonds will be issued in two batches, each with 3 to 4 issuances; the 30-year bonds will have three batches, each with 4 issuances, and the 50-year bonds will have one batch with 3 issuances.
It is noteworthy that the issuance of 30-year ultra-long-term special government bonds totaling 600 billion yuan will commence on May 17 and conclude on November 15, lasting approximately six months with a total of 12 issuances.
Li Hengqing mentioned that the 600 billion yuan accounts for the majority of this year’s ultra-long-term special government bonds, and the six-month period serves two purposes: to mitigate the liquidity squeeze resulting from a large bond issuance and to slowly penetrate the market, allowing ordinary citizens to shoulder the burden.
“The total personal savings in Chinese banks are nearly 150 trillion yuan (approximately 20.8 trillion U.S. dollars). The CCP is eager for ordinary citizens to buy government bonds. If these bonds cannot be sold, they may resort to a form of ‘Patriotic Bonds’ to force ordinary citizens, businesses, and wealthy individuals to buy,” Li Hengqing explained.
According to a report released by the CCP’s Monetary Policy Analysis Group on May 10 titled “China’s Monetary Policy Execution Report Q1 2024,” China’s loan balance is close to 25 trillion yuan, with a deposit balance of nearly 30 trillion yuan.
The report indicates that as of the end of March, out of the approximately 29.6 trillion yuan (around 4.1 trillion U.S. dollars) in total deposits, households account for 49%, enterprises 27%, and the government 14%. These figures have changed from the pre-pandemic levels of 2019, with an increase of 7.1 percentage points for households, and decreases of 4.2 and 3.3 percentage points for enterprises and the government, respectively.
The report also notes that the trend of enterprises and households depositing funds in time deposits has intensified, with the proportion of time deposits to demand deposits increasing from “six-four split” in 2017 to “seven-three split” currently. It is believed that “Household consumption needs to recover, total demand is insufficient, and deposits are mainly held in the household sector (urban and rural residents and individual operators), without further transformation into corporate deposits through spending in the household sector.”
Li Hengqing mentioned that the CCP hopes ordinary citizens will use savings not used for consumption to purchase government bonds, aligning with the government’s intention to invest or alleviate the government’s debt burden. “The problem is that amidst the current political and economic chaos, the issuance of 20, 30, or even 50-year ultra-long-term government bonds reveals that the CCP has no intention of repaying the principal, and moreover, who can guarantee that the CCP regime will not collapse during this period?”
Huang Dawei warned that the marketing prospects for 30 and 50-year ultra-long-term government bonds are not optimistic, and if the market response is lukewarm, the central bank may step in to buy back the bonds, effectively leading to printing money, exacerbating the adverse effects of pegging the Renminbi to government bonds and potentially causing severe inflation.