China plans to issue $411 billion worth of special treasury bonds next year

Chinese authorities have agreed to issue 3 trillion yuan ($411 billion) worth of special treasury bonds next year, two sources said, in a record high, as Beijing ramps up fiscal stimulus to revive its faltering economy.

The plan to issue government bonds in 2025 would be a sharp increase from this year’s 1 trillion yuan and comes as Beijing tries to cushion the blow from an expected increase in US tariffs on Chinese imports when Donald Trump takes office in January

According to the sources, the funds will be used to increase consumption with the help of subsidy programs, modernization of equipment by enterprises and financing of investments in innovative advanced sectors.

Sources with knowledge of the discussions declined to be named because of the sensitivity of the matter.

The State Council Information Office, which handles media inquiries on behalf of the government, the finance ministry and the National Development and Reform Commission (NDRC), did not immediately respond to Reuters’ request for comment.

China’s 10-year and 30-year Treasury bond yields rose 1 basis point (bp) and 2 bp. respectively after the news.

A planned special issue of Treasuries next year will be the largest ever and underline Beijing’s willingness to go deeper into debt to counter deflationary forces in the world’s second-largest economy.

The issue “exceeded market expectations,” said Tommy Hsieh, head of Asia macroeconomic research at OCBC Bank.

“Furthermore, since the central government is the only entity with substantial potential for additional leverage, any bond issuance at the central level is seen as a positive development that is likely to provide incremental support to growth.”

China does not typically include ultra-long special bonds in its annual budget plans, as it views these instruments as an emergency measure to raise revenue for specific projects or policy goals when needed.

Under next year’s plan, about 1.3 trillion yuan to be raised through long-term special treasury bonds will fund “two big” and “two new” programs, sources familiar with the matter said.

The “new” initiatives consist of a durable goods subsidy program that allows consumers to trade in old cars or appliances and buy new ones at a discount, and a separate program that subsidizes large-scale equipment upgrades for businesses.

According to official documents, the “major” programs refer to projects that implement national strategies, such as building railways, airports and agricultural land, as well as strengthening security capacity in key areas.

State planner NDRC said on Dec. 13 that Beijing had fully allocated all of this year’s proceeds from 1 trillion yuan of super-long special treasury bonds, with about 70 percent of the proceeds going to finance “two major” projects and the rest going to “two new” schemes .

THREAT OF TARIFFS

Another big part of next year’s planned revenue will go toward investment in “new productive forces,” as Beijing cuts advanced manufacturing such as electric cars, robotics, semiconductors and green energy, the sources said.

More than 1 trillion yuan will be allocated for the initiative, one of the sources said.

The rest will go to recapitalize big state-owned banks as top lenders grapple with shrinking margins, volatile earnings and rising bad loans, the sources said.

Issuance of new special treasury debt next year will be 2.4 percent of gross domestic product (GDP) in 2023. In 2007, Beijing raised 1.55 trillion yuan through such bonds, or 5.7 percent of economic output at the time.

President Xi Jinping gathered with top officials for the annual Central Economic Work Conference (CEWC) on December 11 and 12 to chart the economic course for 2025.

At the conclusion of the meeting, the state media stated that “it is necessary to maintain sustainable economic growth”, increase the budget deficit ratio and issue more public debt next year, but did not provide specific details.

Reuters reported last week, citing sources, that China plans to widen its budget deficit to a record 4 percent of GDP next year and maintain its economic growth target of around 5 percent.

At the CEWC, Beijing sets targets for economic growth, budget deficit, debt issuance and other areas for the coming year.

Although such targets are usually agreed by senior officials, they are not officially announced until the annual parliament meeting in March and are subject to change before then.

China’s economy has struggled this year due to a severe real estate crisis, high local government debt and weak consumer demand. Exports, one of the few bright spots, could soon face US tariffs of more than 60 percent if Trump follows through on campaign promises.

While risks to exports mean China will have to rely on domestic sources of growth, consumers are feeling less affluent due to falling property prices and minimal welfare. Weak household demand is also a key risk.

Officials said last week that Beijing plans to expand trade programs in consumer goods and industrial equipment.