Why China Uses ‘Special Debt’ to Help Economy Recover


With the virus pandemic pummeling China’s economy, the government plans to sell 1 trillion yuan ($140 billion) of special government bonds to help fund public health and Covid-19 recovery efforts — without inflating the budget deficit. The rarely used financing tool was previously employed during the Asian financial crisis in the 1990s and to help seed the sovereign wealth fund in 2007.

1. What are special government bonds?

Unlike regular government debt, special bonds raise cash for a certain policy or to help solve a particular problem. They are not part of China’s official budget and thus not included in deficit calculations. At more than 3.6% of gross domestic product, the 2020 deficit target is already higher than in recent years. A senior official said increasing debt levels to help the economy are feasible and necessary. The central government will cover interest payments and 30% of the principal.

2. How have they been used before?

During the Asian financial crisis, China sold 270 billion yuan of special government bonds — at the time the country’s largest bond issue — to raise capital for its big state banks and help offset losses from nonperforming assets. In 2007, 1.55 trillion yuan of special government bonds were issued to capitalize China Investment Corp., the sovereign wealth fund. The bond proceeds were used to buy currency reserves from the People’s Bank of China, and those funds then went to CIC.

3. Who will buy the new bonds?

Like government debt, they will most likely to be purchased by commercial banks and other financial institutions, such as insurers and trusts. Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Bank (HK) Ltd., said the special bonds could eventually “be part of the PBOC’s balance sheet, just like what happened in 2007.” Analysts point out that the central bank cannot legally buy the debt directly, so another route would have to be used. In one change from the prior two special government bonds, the anti-virus debt will be sold publicly versus to a selected group of buyers, said Sheng Qi, an analyst at Founder Securities Co..

4. Where will the proceeds go?

They will be turned over to local governments, mainly for health and pandemic-related spending, said the Ministry of Finance. Businesses and households in Hubei province and its capital Wuhan, the original epicenter of the outbreak, will likely be major recipients, said Ding. He added money could also be used to recapitalize smaller banks so they could lend to small and medium-sized businesses. That approach would fit with a government move to extend loan relief and encourage more lending to China’s small businesses.

The Reference Shelf

— With assistance by Sharon Chen, Kari Soo Lindberg, and Jing Zhao