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Analysis | What Is the 'Special Debt' China Uses to Spur Its Economy? – The Washington Post

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China’s government is cash-strapped with Covid-19, tax breaks and a property downturn pulling down income while spending keeps rising to pay for economic stimulus and containing virus outbreaks. One option Beijing has to fill the gap is to sell special sovereign bonds, a rarely used financing tool it last dusted off in 2020 to help lift the economy without inflating the budget deficit. Before that, they were employed during the Asian financial crisis in the 1990s and to help seed China’s sovereign wealth fund in 2007.

1. What are special sovereign 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. The State Council, China’s cabinet, can propose the sale of such bonds, which then requires approval only by a standing committee of the National People’s Congress, which generally meets every two months, rather than the full legislative body, which meets only once a year. That means they can be issued in a more flexible way than regular bonds, which have to be planned for in the budget and approved by the annual session of the NPC. 

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2. Why use this tool now?

China has a target for gross domestic product growth of around 5.5% for this year, but with Covid lockdowns and a property slump, economists say the government is nowhere close to achieving that. One way President Xi Jinping is hoping to fuel a faster recovery is by spending trillions of yuan on infrastructure projects. Funding that kind of stimulus through the budget will be challenging though, given the plunge in tax revenues this year. Part of the financing will come from China’s state-owned development banks, like China Development Bank and Agricultural Development Bank of China, which have been given an additional 800 billion yuan ($120 billion) credit line to provide loans for infrastructure investment. Special sovereign bonds could be an additional source, given some were used for that purpose in 2020. Wang Yiming, an adviser to the central bank’s monetary policy committee, highlighted special national bonds as an option. More likely, the notes may be used to bridge the fiscal gap and finance the stimulus measures the government announced in May, according to Australia & New Zealand Banking Group Ltd. analysts Betty Wang and Xing Zhaopeng.

3. How were these bonds used before?

Some 1 trillion yuan of notes were sold in 2020, early in the pandemic. Exceptionally that time, the Communist Party’s all-powerful Politburo decided to sell the bonds and the NPC gave the official go-ahead at its full session in May. Some 700 billion yuan from that sale was transferred to local governments to support their Covid control efforts and infrastructure investment, according to a report by the Ministry of Finance. The rest was brought into the central government’s general public budget for subsidizing local spending on the outbreak, it shows. Before that: 

• 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. Some of the bonds worth around 950 billion yuan will come due in the second half of this year, Bloomberg-compiled data show.

• 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.

4. How might the bonds affect financial markets?

A surge of bond supply would drive down prices of the securities and push up yields. The issuance in mid-2020 helped to boost the yield on China’s 10-year government bond by more than 20 basis points in about three weeks, to a near six-month high. At the time, liquidity conditions were tight because of a deluge of local government bond supply before the special debt hit the market and the central bank’s cautious approach to monetary easing, in part to avoid fueling asset bubbles. The situation is different now. Interest rate cuts and other central bank easing measures mean the nation’s banks are flush with cash that they can use to soak up any extra bond supply. Also, local governments — which issue their own special bonds used mainly for infrastructure investment — have been ordered to sell almost all of this year’s quota of 3.65 trillion yuan of debt by the end of June. That should leave room for the market to absorb new debt issuances in the second half of 2022.

5. How much are we talking? 

Jia Kang, a former head of a finance ministry research institute, said the 1 trillion yuan sold in 2020 could serve as a “reference” for policy makers when deciding on how much to issue this year. Others think it might be more. Larry Hu, head of China economics at Macquarie Group Ltd., estimated that the Covid outbreaks this year in China likely caused a budget shortfall of 1 trillion to 2 trillion yuan. A sale that size could contribute 1-2 percentage points to gross domestic product growth given the extra financial boost it will give local governments to spend, he estimated, adding the impact on the financial market is expected to be “limited.”

More stories like this are available on bloomberg.com

©2022 Bloomberg L.P.

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U.S. economic growth for last quarter revised up slightly to healthy 3.4% annual rate

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The U.S. economy grew at a solid 3.4 per cent annual pace from October through December, the government said Thursday in an upgrade from its previous estimate. The government had previously estimated that the economy expanded at a 3.2 per cent rate last quarter.

The Commerce Department’s revised measure of the nation’s gross domestic product – the total output of goods and services – confirmed that the economy decelerated from its sizzling 4.9 per cent rate of expansion in the July-September quarter.

But last quarter’s growth was still a solid performance, coming in the face of higher interest rates and powered by growing consumer spending, exports and business investment in buildings and software. It marked the sixth straight quarter in which the economy has grown at an annual rate above 2 per cent.

For all of 2023, the U.S. economy – the world’s biggest – grew 2.5 per cent, up from 1.9 per cent in 2022. In the current January-March quarter, the economy is believed to be growing at a slower but still decent 2.1 per cent annual rate, according to a forecasting model issued by the Federal Reserve Bank of Atlanta.

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Thursday’s GDP report also suggested that inflation pressures were continuing to ease. The Federal Reserve’s favoured measure of prices – called the personal consumption expenditures price index – rose at a 1.8 per cent annual rate in the fourth quarter. That was down from 2.6 per cent in the third quarter, and it was the smallest rise since 2020, when COVID-19 triggered a recession and sent prices falling.

Stripping out volatile food and energy prices, so-called core inflation amounted to 2 per cent from October through December, unchanged from the third quarter.

The economy’s resilience over the past two years has repeatedly defied predictions that the ever-higher borrowing rates the Fed engineered to fight inflation would lead to waves of layoffs and probably a recession. Beginning in March 2022, the Fed jacked up its benchmark rate 11 times, to a 23-year high, making borrowing much more expensive for businesses and households.

Yet the economy has kept growing, and employers have kept hiring – at a robust average of 251,000 added jobs a month last year and 265,000 a month from December through February.

At the same time, inflation has steadily cooled: After peaking at 9.1 per cent in June 2022, it has dropped to 3.2 per cent, though it remains above the Fed’s 2 per cent target. The combination of sturdy growth and easing inflation has raised hopes that the Fed can manage to achieve a “soft landing” by fully conquering inflation without triggering a recession.

Thursday’s report was the Commerce Department’s third and final estimate of fourth-quarter GDP growth. It will release its first estimate of January-March growth on April 25.

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Canadian economy starts the year on a rebound with 0.6 per cent growth in January – CBC.ca

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The Canadian economy grew 0.6 per cent in January, the fastest growth rate in a year, while the economy likely expanded 0.4 per cent in February, Statistics Canada said Thursday.

The rate was higher than forecasted by economists, who were expecting GDP growth of 0.4 per cent in the month. December GDP was revised to a 0.1 per cent contraction from zero growth initially reported.

January’s rise, the fastest since the 0.7 per cent growth in January 2023, was helped by a rebound in educational services as public sector strikes ended in Quebec, Statistics Canada said.

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WATCH | The Canadian economy grew more than expected in January: 

Canada’s GDP increased 0.6% in January

41 minutes ago

Duration 2:20

The Canadian economy grew 0.6 per cent in January, the fastest growth rate in a year, while the economy likely expanded 0.4 per cent in February, Statistics Canada says.

“The more surprising news today was the advance estimate for February,” which suggested that underlying momentum in the economy accelerated further that month, wrote CIBC senior economist Andrew Grantham in a note.

Thursday’s data shows the Canadian economy started 2024 on a strong note after growth stalled in the second half of last year. GDP was flat or negative on a monthly basis in four of the last six months of 2023.

More time for BoC to assess

The strong rebound could allow the Bank of Canada more time to assess whether inflation is slowing sufficiently without risking a severe downturn, though the central bank has said it does not want to stay on hold longer than needed.

Because recent inflation figures have come in below the central bank’s expectations, “it appears that much of the growth we are seeing is coming from an easing of supply constraints rather than necessarily a pick-up in underlying demand,” wrote Grantham.

“As a result, we still see scope for a gradual reduction in interest rates starting in June.”

WATCH | Bank of Canada left interest rate unchanged earlier this month: 

Bank of Canada leaves interest rate unchanged, says it’s too soon to cut

22 days ago

Duration 1:56

The Bank of Canada held its key interest rate at 5 per cent on Wednesday, with governor Tiff Macklem saying it was too soon for cuts. CBC News speaks with an economist and a couple who might be forced to sell their home if interest rates don’t come down.

The central bank has maintained its key policy rate at a 22-year high of five per cent since July, but BoC governors in March agreed that conditions for rate cuts should materialize this year if the economy evolves in line with its projections.

The bank in January forecast a growth rate of 0.5 per cent in the first quarter, and Thursday’s data keeps the economy on a path of small growth in the first three months of 2024. The BoC will release new projections along with its rate announcement on April 10.

Growth in 18 out of 20 sectors

Growth in January was broad-based, with 18 of 20 sectors increasing in the month, StatsCan said. The agency said that real estate and the rental and leasing sectors grew for the third consecutive month, as activity at the offices of real estate agents and brokers drove the gain in January.

Overall, services-producing industries grew 0.7 per cent, while the goods-producing sector expanded 0.2 per cent.

In a preliminary estimate for February, StatsCan said GDP was likely up 0.4 per cent, helped by mining, quarrying, oil and gas extraction, manufacturing and the finance and insurance industries.

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Yellen Sounds Alarm on China ‘Global Domination’ Industrial Push – Bloomberg

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US Treasury Secretary Janet Yellen slammed China’s use of subsidies to give its manufacturers in key new industries a competitive advantage, at the cost of distorting the global economy, and said she plans to press China on the issue in an upcoming visit.

“There is no country in the world that subsidizes its preferred, or priority, industries as heavily as China does,” Yellen said in an interview with MSNBC Wednesday — highlighting “massive” aid to electric-car, battery and solar producers. “China’s desire is to really have global domination of these industries.”

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