China to Start $138 Billion Bond Sale on Friday to Boost Economy

Total of 1 trillion yuan of debt will be sold through November

It is fourth such sale in past 26 years, with the last in 2020

China will start selling the first batch of its 1 trillion yuan ($138 billion) of ultra-long special sovereign bonds this week, as officials ramp up efforts to support the world’s No. 2 economy.

The central government will begin a flurry of such sales this year by issuing 40 billion yuan of 30-year bonds Friday, according to a notice by the Ministry of Finance. That ended months of speculation over when the bonds — the fourth of their kind in 26 years — would be rolled out, after a broad plan was announced in March.

President Xi Jinping’s government is stepping up fiscal support to help the economy, which is facing pressure from a housing crisis and weak consumer confidence. Government spending on infrastructure — which the bonds could fund — will be key to ensuring China hits its annual growth target of about 5%, which is above economists’ forecasts.

Breakdown of China's Ultra-Long Special Central Bond Supply

100 billion Yuan for 50 Years

300 billion Yuan for 20 Years

600 billion Yuan for 30 Years

The boost to gross domestic product could be as much as 1 percentage point, said Xing Zhaopeng at Australia & New Zealand Banking Group.

“The timing of the bond issuance is likely intended at offsetting the impact” of protectionist tariffs the US is threatening against Chinese goods, he said, also citing uncertainty ahead from a Communist Party huddle on reforms set for July.

Bonds with 20-year and 50-year tenors will be offered from May 24 and June 14, respectively. Auctions of the securities will continue until a final batch consisting of 30-year notes goes on sale in November.

Bloomberg reported the special sovereign bonds sale earlier Monday. The issuance will include 300 billion yuan of 20-year bonds, 600 billion yuan of 30-year notes and 100 billion yuan in the 50-year tenor, according to people familiar with the matter, who asked not to be identified as the information is private.

Investors responded positively to the bond sales news, with the benchmark CSI 300 Index of onshore shares paring an earlier loss of 0.9% to close almost flat. Chinese equities in Hong Kong erased an earlier loss to rise 0.6%.

Chinese bonds rallied on Monday as disappointing credit data fueled expectations of more monetary easing and allowed traders to shrug off concerns over a looming spike in government debt supply. The yield on 10-year government bonds fell to 2.29%.

Analysts raised expectations for the People’s Bank of China to lower the amount of money lenders must hold in reserve, to free up cash to buy bonds. Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc, forecast a 25-basis point reduction to the RRR to coincide with the bond sale, and saw an increased chance of a loan prime rate cut.

The bonds “increase the chance of achieving 5% growth,” he added, noting that if the government didn’t issue them soon it would be hard to deploy all the funds this year.

The planned sale comes after a broad credit measure shrank for the first time in April, amid a slew of disappointing data. Exports remain the bright spot in the economy this year, but face uncertainty as tensions between China and some of its biggest trading partners are escalating amid complaints over its excess manufacturing capacity.

Chinese authorities and policy banks slashed their bond issuance by half in the first quarter compared to last year, as local authorities loaded up with too much debt were restricted from borrowing. Funds raised from last year’s sales raised were still being deployed, diminishing the need for more action.