Comparison of China's Latest Ultra-Long-Term Special Treasury Bond Issuance with International Issua

　　The 2024 China Government Work Report proposed issuing ultra-long-term special treasury bonds over several consecutive years, starting this year, to address funding issues for major project constructions. This year, the first issuance will be 1 trillion RMB.

What is an Ultra-Long-Term Special Treasury Bond？

　　Ultra-long-term special treasury bonds consist of three key terms. First, treasury bonds are government bonds issued by the central government to raise fiscal funds, backed by the nation's credit, promising to pay interest and repay principal at maturity. Treasury bonds are considered the safest investment tool due to their high credit rating.

　　The second key term is ultra-long-term, referring to bonds with a duration of 20, 30, or 50 years.

　　Lastly, special means that these bonds are issued for specific policies and projects, with funds dedicated to particular uses. Unlike ordinary treasury bonds, special treasury bonds are included in the government fund budget and not counted in the fiscal deficit.

　　According to the issuance plan, the scales of 20-year, 30-year, and 50-year ultra-long-term special treasury bonds are 300 billion, 600 billion, and 100 billion RMB, respectively. The 20-year bonds will be issued monthly for seven months, the 30-year bonds twelve times over seven months, and the 50-year bonds three times, bimonthly. China previously issued special treasury bonds in 1998, 2007, and 2020. The current 1 trillion RMB issuance will support technological innovation, urban-rural integration, regional coordinated development, food and energy security, and high-quality population development.

　　Image Source: Bloomberg

Characteristics of Ultra-Long-Term Treasury Bonds

　　Ultra-long-term treasury bonds generally offer higher interest rates to compensate investors for long-term risks. The prices of these bonds are highly sensitive to market interest rate changes. Despite fixed nominal interest rates, higher-than-expected inflation can reduce real returns, posing a significant inflation risk for long-term bonds.

　　Image Source: Bloomberg

Issuance Motivation

　　Historically, special treasury bonds were issued for various reasons:

　　In 1995, to meet the Basel Accord's requirement for an 8% capital adequacy ratio for commercial banks, the Ministry of Finance issued 270 billion RMB of 30-year special treasury bonds in 1998 to supplement the capital of four major state-owned commercial banks.

　　In 2007, the Ministry issued 1.55 trillion RMB of special treasury bonds to establish the China Investment Corporation by purchasing equity from the People's Bank of China and Central Huijin Investment Ltd.

　　In 2020, the issuance of 1 trillion RMB of anti-pandemic special treasury bonds created a special transfer payment mechanism to direct funds to local governments.

　　The current issuance aims to address economic growth challenges, including overcapacity in industries, insufficient consumer demand, complex external environments, declining real estate investment, 19 consecutive months of negative PPI growth, and low confidence among businesses and households.

　　Positive Fiscal Policy: Issuing bonds increases supply, which, assuming constant demand, would lower bond prices and raise yields. Additionally, bond issuance withdraws funds from the market, causing short-term liquidity tightening and higher bond yields.

　　Issuing ultra-long-term treasury bonds will increase China's government debt, particularly central government debt, which, at a leverage ratio of 23.8%, is significantly lower than major overseas economies. This provides ample room for leveraging. Conversely, local government leverage (local government debt plus local government financing vehicle liabilities/nominal GDP) has reached 79%. Issuing ultra-long-term bonds can somewhat alleviate local government debt pressure by providing more time.

Experiences of Major Economies Issuing Ultra-Long-Term Treasury Bonds

United States

　　The U.S. primarily issues 10- and 30-year treasury bonds. In the 1970s, it started issuing 30-year bonds, with a rare 50-year bond issued in 1940 to finance World War II. Discussions to reissue 50-year bonds in 2009 and 2015 did not materialize.

Japan

　　Japan began issuing 20- and 30-year bonds in the 1990s and introduced 40-year bonds in 2007. These ultra-long-term bonds are crucial for government financing and for investors seeking stable returns. Insurance companies and pension funds, needing to match long-term liabilities, consistently demand long-term bonds. In a low-interest-rate environment, issuing ultra-long-term bonds locks in low borrowing costs.

　　Image Source: Bloomberg

Impact on the Chinese Economy

Impact on the Bond Market

　　Longer-duration bonds are more sensitive to interest rates. The issuance of ultra-long-term special treasury bonds can create short-term funding tightness, which can be mitigated by monetary policy measures like reserve requirement cuts and interest rate reductions to inject liquidity. Market analysts predict that banks and insurance institutions are likely to allocate these bonds due to their need for medium- to long-term assets.

Impact on the Stock Market

　　Ultra-long-term special treasury bonds' high security and long duration might attract risk-averse investors away from the stock market to bonds. Pension funds and insurance companies might shift some funds from stocks to bonds. However, if the issuance funds support businesses in technological innovation, infrastructure (both traditional and new), rural revitalization, and food and energy reserves, these areas may see substantial investment opportunities, indirectly benefiting the stock market.

　　Personal Prediction: Ultra-long-term special treasury bonds, backed by government credit, can bolster market confidence. In the short term, they might draw funds away from the stock market, but in the long term, the impact depends on the allocation of funds and supported industries and companies. Growth in sectors benefiting from government investments could drive market growth.

　　Author: Haolan