(Yicai) Nov. 1 -- Chinese local governments finished issuing this year’s quota of CNY3.9 trillion (USD547.4 billion) of new special bonds at the end of October, according to the latest data. These funds are now being directed at a broader range of investment targets to reduce debt, aid the real estate sector and improve returns.

Unlike in previous years, since July nearly 22 percent of these funds, at over CNY840 billion (USD117.9 billion), have gone to support local government efforts to resolve existing debt.

To alleviate the pressure on local debt resolution, a certain amount of the bonds will be specifically allocated each year to go towards the resolution of existing government debts from investment projects, the Ministry of Finance said recently. 

This is in response to a recent call from the Ministry of Finance that a certain amount of the bonds be specifically allocated each year for the resolution of existing government debts from investment projects to alleviate the pressure on local debt resolution. The central government set a debt cap of CNY2.2 trillion for local governments in 2023 and lifted this by CNY1.2 trillion (USD168.4 billion) this year, to help them resolve existing debt risks and clear arrears owed to enterprises.

Most of the funds raised from special bonds are used in traditional infrastructure. Last year, more than half of the funds raised was spent on municipal and industrial park infrastructure, transportation infrastructure, as well as the agriculture, forestry, and water conservancy sectors. This year, the proportion increased to nearly 60 percent.

However, recently the Ministry of Finance has proposed that some of these proceeds are also used to buy idle land and unsold housing. This will help promote the balance between supply and demand in the land market, alleviate liquidity and debt pressures on local governments and real estate companies, and also increase the supply of affordable housing, said Deputy Minister of Finance Song Qichao.

Recent audits have shown the returns on some special bond projects have not met expectations, or have not generated any returns at all, thereby increasing pressure on local fiscal expenditure.

It is necessary to enhance the efficiency of special bond fund usage and to ensure that project returns can cover principal and interest to prevent potential risks, experts told Yicai. This can be achieved by strengthening project review and management, broadening the scope of special bond investments, optimizing the allocation of special bond quotas and reinforcing supervision.

Editor: Kim Taylor