Chinese Special Purpose Bond (SPB) issuance almost tripled to 950 billion yuan (US$133 billion) in the first two months of 2020 compared with the previous year.
According to Moody's, regional and local governments' (RLGs) issuance of SPBs spiked over the period, as authorities gear up to accelerate infrastructure and public health spending in a bid to curb the economic impact from the coronavirus outbreak.
"RLGs have so far announced 6.4 trillion yuan of infrastructure and public health spending for 2020. Although some of these projects are not new and will take time to implement, we expect the pace of infrastructure investment to pick up following the containment of coronavirus," says Jack Yuan, a Moody's assistant vice president and analyst.
Guangdong province was the largest issuer of SPBs in the first two months of 2020, and among the regions with the largest spending plans for this year. It has earmarked 800 billion yuan towards expanding transportation networks and public medical facilities, as well as the rollout of a 5G network among other projects.
Although increased infrastructure spending can boost growth in periods of economic weakness, it will also result in higher debt burdens for RLGs, infrastructure state-owned enterprises and local government financing vehicles, and increase financial risks amid slowing fiscal revenue growth, says Moody's.
In addition, there may be a more limited amount of quality, revenue-generating projects after close to a decade of double-digit growth in infrastructure spending. Thus, RLGs may take on less economically-viable projects and draw on fiscal revenue to help repay their debt, if projects fail to generate projected financial returns.
"We consider the credit quality of SPBs to be similar to that of other Chinese RLG bonds, because they are not ringfenced," the rating agency says. "Ultimately, the issuing provincial government remains responsible for the repayment of all of its bonds".