With businesses in China widely and actively rebounding since January, China's growth is speeding up from the pandemic impact felt since early 2020. Economic activity is once again up and running and the country's fiscal revenue increased in March on the back of recovering economic vigor.

Figures from the Ministry of Finance in late April show that fiscal revenue grew 5.5 percent in March after declining 1.2 percent in January-February, a strong sign of recovery after three challenging years.

Critical factors

A number of critical factors have served in this process. Among them, central fiscal funds have not only helped several localities survive the hard times, but also set up new projects that benefit local livelihoods. Figures from the Ministry of Finance showed that special bond issuance for the first three months of this year has come in at 1.36 trillion yuan ($195.6 billion), up 4.53 percent from the same period last year.

Experts said that during the past three years, China's economy maintained a stable and sound performance thanks to the consistent fiscal fund offerings, especially special-purpose bonds. This can be partly seen from the rapid growth of infrastructure investment.

Each year between 2018 and 2022, part of the quota of special local government bonds was issued and allocated several months in advance to energize investment and facilitate local infrastructure construction. The projects they've supported and sustained have helped localities perform notably despite hits from the pandemic. For instance, some 1.46 trillion yuan in the 2022 quota for local government special bonds were issued in December 2021 as an effort to help spur investment and support the economy.

Overall growth stable

Special local government bonds are a form of off-budget debt that local governments use to raise cash for a particular policy and projects approved by central finance, primarily involving infrastructure investments. Such bonds were introduced by the central government in 2015.

Li Xuhong, a professor at the Beijing National Accounting Institute, said that during the past three years, fiscal funds such as special local government bonds served as a key fulcrum of macro-economic maneuvers in countering pandemic hits and keeping overall growth stable.

"First, they've worked effectively to ensure and improve people's livelihoods. Most projects invested in using special local government bonds are government-approved projects with strong public attributes and visibly serve in improving people's lives. For instance, a large number of projects to help with rural vitalization were supported by special local government bonds. In addition, these funds, particularly in recent years, have played an irreplaceable role in catalyzing investments when private investments somehow lost steam, keeping overall investment stable," Li said.

For Liu Xiaojun, deputy head of the Heqing township government in Mianyang, Sichuan province, his greatest relief last year was the completion of more than 30,000 mu (2,000 hectares) of high-standard farmland construction accumulated by the end of last year. The improvements made in the process have largely facilitated local farmers' cultivation process.

"Every year when it comes to the rice harvest season, the harvesting is quite a challenging process for local farmers. In the mountainous area, irrigation and mechanized cultivation have been difficult and time-consuming," he said. "With local farms upgraded with high-standard farmland, agricultural mechanization has been greatly improved. The efficiency of farm work, particularly during harvest season, has improved and lifted local people's incomes."

Southwest China's Sichuan province is home to 96.95 million mu of arable land as of 2022 and ranks ninth nationwide in terms of grain production. Many of the key projects supported by special local government bonds were agriculture- and rural-related. Since 2018, some 79.2 billion yuan released from special local government bonds have supported 519 key rural development projects in 21 cities in Sichuan.

Further innovations

He Qiang, an official responsible for local bond issuances and debt at the Sichuan Provincial Finance Department, said that there have been innovations in the application of special local government bonds. Such new developments have worked effectively in catalyzing larger amounts of social investment.

"For example, for some water conservation projects, financing innovation modules used funds released from the special local government bonds as capital to catalyze social and private investments for the projects," he said. "Since 2018, a total of 6.8 billion yuan released from special local government bonds have been used as primary capital for projects on rural vitalization and have catalyzed a total of 40 billion yuan in social investments."

Li at the Beijing National Accounting Institute underlined the role that special local government bonds have played in energizing social capital and completing projects that benefit livelihoods, especially when social investment momentum was relatively in the doldrums during the COVID-19 pandemic.

"Since 2020, due to the severe disruptions caused by COVID-19, many key projects at local levels that were previously planned outfaced the risk of shutting down because of lack of funding. Accelerating the issuance and allocation of special local government bonds has played a role in the counter-cyclical fiscal policy adjustment and ensured the stable operations of key infrastructure projects, generating real economic activity," she said.

Li explained that in recent years, fiscal revenue and expenditures at local government levels have remained in a tight balance. The COVID-19 pandemic has brought a heavier blow to them and hampered their capacity to support key projects that bear on both local livelihoods and the region's stable economic performance.

"In recent years, the constant earlier issuance and allocation of special local bonds have alleviated spending pressures for local governments in a timely manner and successfully ensured the early opening of infrastructure projects every year, generating real economic activity," she said. "In addition, by precisely formulating the areas allowed using the funds of these special local bonds, it has ensured that the funds are put in place where the country's high-quality development drive needs them the most, such as rural vitalization."

Promoting restructuring

The Government Work Report released during this year's two sessions — the top legislative and political advisory meetings — in March has made it clear that the government will work to promote restructuring while reining in an incremental buildup of hidden debt. When attending a news conference in early March, Liu Kun, China's finance minister, said that while the imbalance between fiscal revenue and spending remains acute, there won't be any phase-out in fiscal spending on people's livelihoods.

"As a transparent, compliant fiscal financing tool of good quality, special local government bonds have been an integral vehicle in China's fiscal financing and the role they have played during the past three years is worth recognizing," said Robin Xing, chief China economist with Morgan Stanley.