Bonds to help shantytown bid

Analysts see their issuance as key means of fueling investment and boosting growth

Bond issuances by local governments in China, with the specific remit of supporting shantytown renovation, is likely to accelerate in the coming months as a financial facility to fuel infrastructure investment and support economic growth, said analysts.

In terms of fiscal policy, "the central government's subsidies (for the shantytown renovation program) will not be reduced, and these will be accompanied by an increase in shantytown renovation-related special local government bond issuance," said an expert close to the Ministry of Finance.

Local governments' shantytown renovation targets for 2019 should remain within a reasonable level matching fiscal expenditure, he said.

China's shantytown renovation program stepped up a gear in the past three years. It is aimed at improving the living conditions of low-income people, increasing domestic demand and facilitating the nation's urbanization process.

Local governments started to issue special-purpose bonds for shantytown renovation in June. By the end of the third quarter of this year, more than 165 billion yuan ($23.8 billion) had been raised using this financial instrument, according to China Central Depository & Clearing Co Ltd.

Goldman Sachs economist Song Yu also expected local governments to increase the amount of special bonds targeting the program, along with a potential increase in the program's target next year.

The recent policy signal is important, as "shantytown redevelopment is a key element of domestic demand", said Song.

Support for the renovation program, along with the authorities' recent moves on fiscal and monetary fine-tuning, are being read by the market as measures to mitigate domestic and external economic growth headwinds.

The authorities announced an almost 750 billion yuan cash injection into the banking system on Sunday by lowering the reserve requirement ratio by 1 percentage point, and Minister of Finance Liu Kun also pledged to further reduce taxes.

The government plans to redevelop 15 million homes by 2020. By the end of September, around 92 percent of the annual renovation target had been accomplished, revamping 5.34 million shantytown homes, according to official data.

The market has also been concerned since the end of last year that the government may tighten financing related to the program, in order to rein in fast rising property prices, especially in third and fourth-tier cities.

A statement issued after the latest State Council executive meeting stressed that any irregular borrowing by local governments, under the name of shantytown renovation, should be prohibited. It also called for removing favorable policies in the cash-settlement shantytown renovation program for cities with low housing inventory and high upside pressures on housing prices.

"Beijing is walking a tightrope between stimulating domestic demand and reining in the property bubble and associated financial risks," said Lu Ting, Nomura Securities chief economist in China.