Proactive fiscal policies proving effective so far

Bonds boost infrastructure investment; urban renovation may drive growth

China's proactive fiscal policies have been effective so far, going by the positive results generated by expedited issuance of local government bonds, which has boosted investment in infrastructure and could underpin growth for the whole year, experts said.

Data from the Ministry of Finance showed that in the first two months of this year, local government bonds worth some 1.2 trillion yuan ($189.4 billion) have been issued, including newly issued local government bonds worth 1.07 trillion yuan.

By the end of February, special local government bonds raised 877.5 billion yuan. The pace of issuance was said to be "expedited", according to insiders of the financial services industry and macroeconomic experts.

Gao Ruidong, chief economist at Everbright Securities, said that by the end of March, local government bond issuances will likely reach 37 percent of the year's total, much faster than that in the January-March period of 2020 and one of the fastest issuances in recent years.

"The expedited issuance of special local government bonds reflects that this year, fiscal policies have been front-loaded," he said. "Special local government bonds are an important fulcrum in keeping growth stable. Expediting such issuances will better facilitate funding for key projects and catalyze effective investment at the earliest possible time."

A circular from the State Council, China's Cabinet, last week decided on the division of responsibilities on key economic tasks stated in this year's Government Work Report, which underlined the imperativeness to enhance consistency in macroeconomic policies. It said that proactive fiscal policies should be more effective and targeted. Policies shall be front-loaded and more forward-looking, and policy tools in the reserves shall be put to use in a timely manner to facilitate stable economic performance.

Gao said bond issuances at a faster clip and deployment of funds raised from the special local government bonds have led to a visible rebound in infrastructure investment from January to February.

"With fiscal policies staying front-loaded and generating policy impact, we expect infrastructure investment to keep rebounding. This is critically important for changing the demand contraction and anchoring market sentiment," he said.

He said the proportion of funds (raised from the increased allocation of special local government bonds) invested in projects in areas like agriculture, forestry and water conservancy has increased by a large margin. This indicates investment projects related to urban renovation are likely to become new growth drivers.

Shi Yinghua, a professor at the Chinese Academy of Fiscal Sciences, said that a key factor in effective investment is to optimize supply－and government-backed investment is likely to offer guidance and lead improvement on the supply front.