|10 June, 2019

China to use special local bonds as capital for some projects

China will allow local governments to use proceeds from special bonds as capital for qualified major investment projects, the state news agency, Xinhua, said

An employee hands over U.S. dollar banknotes to a customer at a branch of Bank of China in Hefei

An employee hands over U.S. dollar banknotes to a customer at a branch of Bank of China in Hefei

REUTERS/Stringer Shanghai

BEIJING- China said on Monday that it will allow local governments to use proceeds from special bonds as capital for major investment projects, in a bid to support the slowing economy amid an escalating trade war with the United States.

Local governments should use special bonds for major projects including highways, gas and power supply and railways, Xinhua state news agency said, citing a cabinet document.

That would help "increase effective investment, improve economic structure, stabilise aggregate demand and maintain sustained and healthy economic development", Xinhua said.

"On the basis of increasing the size of special bonds by a big margin, we should strengthen macro-policy coordination and maintain reasonable and sufficient market liquidity."

Monetary policy should be appropriate to support special bond issuance and project financing, while financial institutions should ensure reasonable financing needs of major projects, Xinhua cited the cabinet as saying.

Financial institutions and individuals would be encouraged to invest in such bonds, it added.

But local governments' special bonds must be used to fund major projects that have certain returns on investment and local officials should strengthen risk controls for their special bond issuance, project management, it added.

Local governments must invest special bonds in real investment projects, instead of using them as the source of funds for government investment funds, industrial investment funds and other equity funds, it said.

Beijing has rolled off policy measures in recent months to support the economy that has been pinched by a tit-for-tat trade war with the United States. Economic growth slowed to a 28-year low of 6.6 percent in 2018 and further cooling is expected this year.

(Reporting by China Monitoring Desk and Kevin Yao; Editing by Nick Macfie) ((kevin.yao@thomsonreuters.com; +8610 6627 1215; Reuters Messaging: kevin.yao.thomsonreuters.com@reuters.net))

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