Beijing announced that the National People's Congress (NPC) will commence its annual meeting on 22 May, after being postponed from 5 March due to the COVID-19 outbreak. Nobody is sure if the year 2020 GDP growth target will be announced there given the deep downturn in Q1. If a target is given, we guess it is going to be at an achievable level, say 3% or slightly lower. No matter whether a growth target will be given, we will definitely see a bigger fiscal budget deficit number and higher CPI target in the annual Government Work Report (GWR) announced at the NPC.
We expect a significant increase in the headline fiscal budget deficit to 4.5% or even 5.0% of GDP in 2020, from the budgeted 2.8% in 2019, given a declining fiscal revenue and an expanding expenditure. Meanwhile, a quota of special local government bond issuance at CNY3.5tn (not surprising if’s as high as CNY4tn) will be given. Moreover, the CPI inflation target will likely be raised to 3.5%.
In regard to local government bond issuance, we expect to see a huge supply of local government bonds in May after an issuance of CNY1000bn local government special bonds (i.e. the third batch of local government special bonds for 2020) was announced.
In April this year, we saw a seasonal decline in local government bond supply, which will be followed by an increase in May and June (chart 1). Repeating its pattern in previous years, supply will remain abundant in Q3, we believe.
Just in April, 5-year paper accounted for 24.21% of the total supply of local government bonds, while 7-year only 13.43%. In the longer end, 10-year paper accounted for 23.7% of the total, while 15-year and longer-dated 38.66%. But take a look at the year-to-date picture, we note 10-year paper accounts for 38.68% of the total, up more than 10% from 2019 (chart 2). If this is the trend for the rest of the year, 10-year and longer-dated paper will become predominant in the total supply over the rest of the year.
Historically, net OMO injection size increases whenever local government bond supply is picking up (chart 3). Given that supply in April this year was small, we were not surprised by PBOC's decision to stop making net OMO injection throughout the whole month. With supply picking up sharply in May, we will see PBOC resume net injection after the 5/1 holiday.
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