(Bloomberg) -- China’s government granted provinces their full allocation of special bonds to be used for infrastructure investment, a sign it’s stepping up stimulus to boost an economy overshadowed by a worsening Covid outbreak.

“We will waste no time to match the newly granted quota with eligible projects,” Deputy Finance Minister Xu Hongcai said at a briefing in Beijing on Tuesday. “We will ensure that special bond proceeds will be used to drive investment up significantly.”

Regions with stronger financial capabilities and lower debt burdens were favored in the distribution of the debt allowance, he said. The government also took into account compliance with fiscal discipline and the pace of using the funds, he added.

Beijing has pinned its hopes this year on infrastructure to help bolster the economy in the face of a property market slump and Covid lockdowns. Local governments have planned investments on “major projects” of at least 14.8 trillion yuan ($2.3 trillion) this year, according to Bloomberg calculations.

 

The government last month set this year’s quota for special local bond sales at 3.65 trillion yuan, including the 1.46 trillion yuan granted in December to “front load” stimulus. Most of the bonds are meant for infrastructure investment, with some also intended for other purposes like boosting banks’ capital. Xu said 86% of the quota handed down last year has been used. 

Local governments have reserved 71,000 projects that would be funded with the proceeds of special bonds, said Wang Xiaolong, head of the Ministry of Finance’s department of treasury. Construction has started on 75% of the projects funded by this year’s special notes already sold, he added.

More than 415 billion yuan of the proceeds was invested in the building of urban and industrial park infrastructures, about 232 billion yuan was spent in transportation facilities, and around 202 billion yuan was used to construct low-cost housing, Xu said.

In order to make sure the bond proceeds are used in a timely manner, Xu said progress of bond sales and its spending will be linked to the amount of quota provinces can get in future.

Song Qichao, an official at the budget department at the Ministry of Finance, said proceeds of special bonds that were part of last year’s quota should be spent before the end of September. 

During the first quarter, sales of special local government bonds hit a record high for that time of year. Issuance will likely accelerate further as the State Council, China’s cabinet, said last month the remainder of the annual quota should be used up by the end of September. 

Infrastructure investment increased 8.1% in January-February from a year ago, compared with just 0.4% expansion for the whole of 2021. However, when adjusting for price increases, the actual rate was negative.

Chinese leaders have urged monetary and fiscal policies must be coordinated this year. Economists expect the central bank to cut its key policy interest rate on Friday and possibly reduce the reserve requirement ratio this quarter. Such moves will lower the funding costs and free up more cash for banks, which are the major buyers of government bonds in China.

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