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Chinese Local Governments Turn to Special Bonds for Urban Renewal and Affordable Housing

Chinese local governments are planning to issue special bonds to support urban renewal projects and affordable housing, part of efforts to stimulate economic growth and counteract a slowdown in the economy. Hunan province, located in the south of China, recently issued urban renewal special bonds worth 234 million yuan (US$32 million) with a five-year maturity and a coupon rate of 2.66 percent.

Chinese Local Governments Turn to Special Bonds for Urban Renewal and Affordable Housing

Local governments across China are gearing up for the coming year, as they prepare to issue special bonds that will fund various projects, including urban renewal, the renovation of urban villages, and affordable housing. These bonds are a key tool for China's fiscal policy and have grown in importance over the years as the definition of infrastructure has evolved. Unlike regular government bonds, special bonds are designed to support specific policies or address particular problems, making them more flexible and not subject to China's official budget.

As of the end of September, Chinese municipalities had issued special bonds worth approximately 3.3 trillion yuan, which represents 90 percent of the official quota set for 2023. This move to issue special bonds aligns with a directive from a State Council Executive Meeting in late July, which aims to promote the transformation of urban villages into "super-large and mega cities." Urban villages are often plagued by overcrowding and safety issues and are typically inhabited by low-income and transient populations.

Urban renewal projects have the potential to improve living conditions, stimulate demand for construction materials and household appliances, and enhance the property sector's structure. However, some analysts suggest that the boost from these projects and special bonds might be limited, as private developers are facing financial constraints, and their involvement in urban renewal projects could be constrained.

Fitch Ratings analysts noted in August that urban renewal projects may primarily benefit larger, state-owned developers and those with previous experience in such initiatives. Additionally, developers with unsold housing units in major cities could find opportunities to collaborate with local authorities, either by offering their properties as affordable housing or by assisting in the resettlement of urban village residents.



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