China to start selling ultra-long term sovereign bonds

The Chinese government will start issuing ultra-long special sovereign bonds to support the economy, the finance ministry said today (May 13).

The central government will start selling 40 billion yuan ($5.5 billion) of 30-year bonds on May 17, with the final batch on sale in November. Authorities will also start offering bonds with 20-year and 50-year tenors from May 24 and June 14 respectively.

In March, Chinese premier Li Qiang first revealed plans to issue “ultra-long term special government bonds” over the next few years to finance infrastructure. At the Nation People’s Congress, he said the government this year would issue one trillion yuan in these bonds, which are not included in the budget. The Chinese government has set a budget deficit target of 3% of GDP for 2024.

The finance ministry has not revealed the full details of its programme. Reuters reported today that authorities plan to issue 300 billion yuan of 20-year bonds, 600 billion yuan n 30-year maturity, and 100 billion yuan in 50-year tenor, citing people familiar with the matter.

The ministry will meet officials from China’s top commercial banks today to arrange the bonds’ underwriting, according to a message sent to lenders seen by the Financial Times.

In October 2023, Beijing also announced it would issue an additional one trillion yuan of bonds for the financial year, to back local governments’ infrastructure spending. The rare move, announced in the middle of a financial year, widened the country’s budget deficit for 2023 from 3% to around 3.8% of GDP.

Local governments are facing financial strain, largely due to declines in land revenues amid an ongoing property sector downturn.

China’s credit supply unexpectedly shrank in April, reflecting a contraction in financing activity, according to People’s Bank of China (PBoC) data released last week. Aggregate financing, a broad measure of China’s credit, fell by almost 200 billion yuan in April from the previous month.

Despite the ongoing economic challenges, policy-makers have set a 5% economic growth target for 2024.

Beijing’s fiscal support also comes at a time when the PBoC’s ability to further ease monetary policy is limited by wide US-China interest rate differentials. Cutting key interest rates further could put further pressure on the yuan and lead to capital outflows.

The PBoC is expected to set its one-year medium-lending facility (MLF) rate, a key policy rate, on May 15. The central bank has kept the rate unchanged at 2.5% since August 2023.

In its quarterly monetary policy report published on May 10, the PBoC noted that long-term sovereign bond yields had fallen in the first quarter. The 10-year sovereign bond yield fell from 2.56% from the beginning of the year to 2.29% at the end of the first quarter, while the 30-year yield fell from 2.84% to 2.46%.

While the yields mainly reflect expectations of long-term economic growth and inflation, they are also influenced by factors like safe asset scarcity.

In the first quarter, banks, insurance companies increased their demand for risk-free assets, including long-dated bonds, the PBoC said. In the first quarter, the transaction volume of 20 and 30-year bonds in the interbank bond market was 8.9 trillion yuan. This was around five times more than the same period last year.

The central bank noted that long-term government yields had recovered in late April, with the 30-year yield returning to above 2.5%. It said it expects the supply and demand in the bond market to “move further towards equilibrium”.