The Chinese central government announced on May 13th the arrangements for issuing general national bonds and special long-term national bonds in 2024 in order to raise financial funds. The special long-term national bond terms include 20-year, 30-year, and 50-year periods with interest payments every six months. The issuance of the 20-year special long-term national bond began on May 24th, the 30-year bond on May 17th, and the 50-year bond on June 14th. The tense situation of the Chinese government’s deficit and financial operations in a bind can be seen. The government work report of the National People’s Congress mentioned issuing one trillion yuan this year, specifically for “implementing major national strategic actions and enhancing security capabilities in key areas.” This indicates the attempt by the Communist Party of China to stimulate the sluggish economy and boost the recovery and development of key industries and projects.
In the first quarter of this year, the yield of the 10-year government bonds in China fell below the 2.3% mark. The yield of the 30-year government bonds has also dropped by 30 basis points this year. The announcement of the details of the special bonds came at a time when bond rates hit historic lows. With the Chinese stock and property markets slumping and the public lacking both money and confidence, there might be limited willingness among the people to subscribe voluntarily to long-term bonds, making it challenging for them to sell.
Over the years, the Chinese government has resorted to issuing bonds during economic downturns to stimulate the economy. This year marks the sixth time the Chinese government is issuing special long-term national bonds, starting with one trillion yuan and continuing over the next few years. The government has issued special bonds three times before, in 1998 with 270 billion yuan, in 2007 with 1.55 trillion yuan, and in 2020 with one trillion yuan, corresponding to the financial crises of 1998, 2007, and the COVID-19 pandemic of 2020.
Even if the one trillion yuan long-term bonds are successfully issued, it is unlikely to make a significant impact on reviving the Chinese economy. The Central Budget for 2024 issued by the Chinese Ministry of Finance shows that central transfers to local governments have surpassed 10 trillion yuan this year. The main beneficiaries of these transfers are financially weaker provinces in central and western China and the northeast, with Sichuan, Henan, Hunan, Hubei, Hebei, and Heilongjiang receiving over 400 billion funds each to ease regional fiscal deficits.
The US Treasury currently issues the longest-term bonds after the 10-year bonds, which are the 30-year bonds. These bonds also pay interest semi-annually. The US Treasury bonds, along with other corporate long-term bonds, focus on long-term returns, but this investment comes with its own risks and generally higher returns. In the US Treasury market, the 30-year bonds are the longest-term products available. Private companies can also issue bonds with various terms, such as 15-year, 20-year, or 25-year bonds.
The long-term US Treasury bonds are considered among the safest securities and one of the most actively traded bonds globally. In a healthy economy, the yield curve for bonds is typically normal, with long-term bonds having higher yields than short-term bonds. One advantage of long-term bonds is that they lock in interest rates over time. However, they also carry risks; if interest rates rise, bond prices fall, leading to lower prices. The US Treasury bonds offer safety and liquidit…
…y, making them a secure investment option. They are also highly liquid, with an extensive secondary market, facilitating easy buying and selling on any trading day. Additionally, the US citizens can directly purchase long-term bonds from the government without having to go through bond brokers. Many mutual funds also offer long-term bonds to investors.
While the US currently issues only up to 30-year bonds, other countries, including China, have issued 50-year bonds. Compared to the 30-year bonds, the additional cost of 50-year bonds is generally lower. Some have suggested that the US government extend its maximum debt maturity from the current 30 years to 50 years. This move could ensure long-term funding support. But the question remains whether the US will issue such long-term bonds and what returns it might achieve.
Several other Western countries have issued 50-year and even 100-year bonds. In 2023, India issued 50-year bonds for the first time, which were fully sold due to growing demand from insurance companies and pension funds. However, there have been cases of failures in issuing long-term debt. Argentina, for instance, issued a hundred-year bond in 2017, but it ended in default and restructuring within three years, causing investors to lose nearly half of their initial investments.
Long-term bond issuance by private Western companies has also been popular. In the 1990s, several companies like Disney and Coca-Cola issued 100-year bonds. Some universities in the US also issued 100-year bonds with higher yields but smaller amounts. The possibility of the US issuing ultra-long-term bonds to reduce its debt and interest expenses has been considered by past administrations and might be revisited in the future.
The main motive behind China’s issuance of long-term bonds seems to be a strategy to force ordinary citizens to purchase them through coercive means, ultimately extracting wealth from people’s savings and likely leading to increased inflation. The lack of independent operations by the Chinese central bank raises concerns about the future implications of such financial maneuvers, as the potential consequences on currency inflation and economic stability remain uncertain.
In conclusion, the issuance of long-term bonds by the Chinese government is viewed with skepticism by many observers, who question the sustainability of such strategies in the face of larger economic challenges and lack of transparent management practices within the regime. The impact of such financial decisions on the broader economy and the well-being of the Chinese population remains uncertain, raising concerns about the effectiveness and long-term implications of China’s economic policies.