Compared to local government bonds, treasury bonds have lower interest rates and longer maturity periods. The central government's issuance of bonds not only provides room for maneuver but also reduces the cost of issuing bonds and extends the cycle. From the perspective of expenditure, ultra-long-term special treasury bonds will be specifically used for the implementation of national major strategic initiatives and the construction of security capabilities in key areas.

On May 17th, the official debut of 1 trillion yuan in ultra-long-term special treasury bonds took place. Some external viewpoints interpret this move as a transformation from a "land finance" to a "treasury bond finance" model. In the future, it may become the norm for the central government to issue treasury bonds and allocate some funds to local governments through transfer payments. Local governments will use part of the funds to purchase existing housing as affordable housing or talent housing, which will be used for leasing, mortgaging, and other methods to revitalize the real estate market, alleviate livelihood difficulties, solve the real estate conundrum, and promote the transformation of local finance.

It is reported that the first issue of treasury bonds on May 17th is a 30-year fixed-rate interest-bearing bond, a book-entry bond, with a competitive bidding par value of 40 billion yuan. Interest will begin to accrue from May 20, 2024, and will be paid semi-annually, with interest payment dates on May 20th (postponed on holidays) and November 20th each year, with the principal and the last interest payment due on May 20, 2054. According to Wind, the coupon rate for the 2024 ultra-long-term special treasury bond (first issue) (24 Special Treasury Bond 01, 2400001.IB) is 2.57%.

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On May 17th, the Ministry of Finance issued a "Q&A for Individual Investors on Purchasing Treasury Bonds," stating that individual investors who hold book-entry treasury bonds to maturity can obtain stable principal and interest income. At the same time, book-entry treasury bonds can be traded in the market during their existence, with trading prices fluctuating with market conditions, which may result in trading profits or face the risk of losses. Therefore, individual investors who purchase book-entry treasury bonds not for holding to maturity but for trading profits should have certain investment experience and risk-bearing capacity.

According to this year's "Government Work Report," in 2024, China plans to first issue 1 trillion yuan in ultra-long-term special treasury bonds, with the purpose of "systematically solving the funding issues of some major construction projects in the process of building a strong country and national rejuvenation." It is planned to issue them for several consecutive years, "specifically for the implementation of national major strategic initiatives and the construction of security capabilities in key areas."

On April 17th, Deputy Director of the National Development and Reform Commission, Liu Sushe, stated at a press conference held by the State Council Information Office that the focus of the ultra-long-term special treasury bonds is to accelerate the realization of high-level scientific and technological self-reliance, promote the integrated development of urban and rural areas, promote coordinated regional development, enhance the security of food and energy resources, promote high-quality population development, and comprehensively advance the construction of a beautiful China.

According to the arrangement, this round of ultra-long-term special treasury bonds will be divided into 20-year, 30-year, and 50-year maturity varieties, with a total of 22 issues, all paying interest semi-annually. Among them, the 30-year ultra-long-term special treasury bond "landed the earliest," with the first issue on May 17th; the 20-year ultra-long-term special treasury bond was first issued on May 24th, and the 50-year ultra-long-term special treasury bond was first issued on June 14th.

In the strict sense, China has only issued special treasury bonds three times since the reform and opening up: the 1998 Asian financial crisis, the 2007 global financial crisis, and the 2020 special treasury bonds for fighting the pandemic. In the fourth quarter of 2023, the central government increased the issuance of treasury bonds by 1 trillion yuan, managed as special treasury bonds, all arranged for local use through transfer payments, all listed as central fiscal deficits, with principal and interest repayments borne by the central government, without increasing the local repayment burden.In recent years, the real estate market has been sluggish, and local fiscal pressures have increased, leading some viewpoints to call for the central government to take on the responsibility of leveraging and supporting fiscal expenditures. Previously, the debt issues of cities such as Guizhou, Wuhan, and Kunming have attracted attention. According to data from the Ministry of Finance, the revenue from the transfer of state-owned land decreased by 23.3% and 13.2% in 2022 and 2023, respectively. Moreover, 80-90% of government fund revenue comes from land transfer income, and objectively speaking, the decline in fiscal revenue also restricts the fulfillment of public functions by local governments.

Several experts have pointed out to "Caijing" that it may become a norm for the central finance to bear more fiscal deficits and issue national bonds to increase transfer payments to local governments. Luo Zhiheng, Chief Economist at Guangdong Kaiyuan Securities, analyzed that compared with local debt, the interest rate on national bonds is low, and the maturity period is long. Issuing bonds by the central government not only has room for expansion but also can reduce the cost of issuing bonds and extend the period.

Ma Guangrong, Deputy Dean of the School of Finance at Renmin University of China, introduced in an article in "China Finance" that, looking back at history, China has issued relatively fewer national bonds with a term of 30 years or more. The special bonds for epidemic prevention and control in 2020 and the additional national bonds in the fourth quarter of 2023 also mostly have a term of 10 years or less. This time, the ultra-long-term special national bonds are issued and repaid by the central government itself, and a considerable part of the funds will be used by the central government itself, while the remaining funds will be transferred to local governments for use, with the central government defining their detailed uses.

From the perspective of funding sources, in addition to the general public, the People's Bank of China may also participate in the secondary market trading of national bonds.

On April 23, the Ministry of Finance issued a statement pointing out that it supports gradually increasing the buying and selling of national bonds in the central bank's open market operations to enrich the monetary policy toolkit. On the same day, the person in charge of the People's Bank of China said in an interview that the central bank's trading of national bonds in the secondary market can be a way of liquidity management and a reserve of monetary policy tools. "Financial Times" reported and analyzed that as the central bank includes the buying and selling of national bonds in the regular open market operation tools in the future, it can regulate market supply and demand through the trading of national bonds, and will also promote the stable operation of the yield. Looking at the normal operation of the market in recent years, 2.5% to 3% may be a reasonable range for the yield of long-term national bonds.

From the perspective of expenditure direction, the ultra-long-term special national bonds will be used for the implementation of major national strategies and the construction of security capabilities in key areas, and will be used to promote the integrated development of urban and rural areas, promote coordinated regional development, and so on. Some experts analyze that alleviating the downward real estate risk and boosting the macroeconomy will be one of the directions of expenditure for the ultra-long-term special national bonds. This analysis has not been confirmed by Chinese government departments.

On the 17th, the day of the first issue of the ultra-long-term special national bonds, a national video conference on ensuring the delivery of houses was held in Beijing. Vice Premier He Lifeng pointed out at the meeting that at present, efforts should be made to classify and promote the disposal of in-progress unsold difficult-to-deliver commercial housing projects, fully support the financing and completion and delivery of projects that should be continued, and protect the legitimate rights and interests of homebuyers. Relevant local governments should start from reality and properly dispose of idle residential land that has been transferred by reclaiming, purchasing, and other means to help real estate companies in financial difficulties. In cities with a large inventory of commercial housing, the government can purchase on demand and reasonably purchase some commercial housing at a reasonable price to be used as affordable housing.

On the afternoon of May 17, the heads of the Ministry of Housing and Urban-Rural Development, the Ministry of Natural Resources, the People's Bank of China, and the State Administration of Financial Supervision held a press conference to introduce the supporting policies for the work of ensuring the delivery of houses. At the meeting, Vice Minister of Housing and Urban-Rural Development Dong Jianguo introduced that the focus of the work to ensure the delivery of houses mainly includes four aspects: First, to fight a tough battle to ensure the delivery of commercial housing projects and prevent the disposal of unfinished risks. Second, to further play the role of the urban real estate financing coordination mechanism to meet the reasonable financing needs of real estate projects. Third, to promote the digestion of existing commercial housing. Urban governments adhere to "purchasing according to demand" and can organize local state-owned enterprises to purchase some existing commercial housing at a reasonable price to be used as affordable housing. Fourth, to properly dispose of and revitalize existing land. Existing land that has not yet been developed or has started construction but not been completed should be properly disposed of and revitalized through government reclamation and purchase, market circulation transfer, and enterprise continued development, to promote real estate companies to alleviate difficulties and reduce debt, and to promote the efficient use of land resources.

In this regard, Vice Governor of the People's Bank of China Tao Ling said at the State Council's regular policy briefing that a 300 billion yuan affordable housing reloan was established to encourage and guide financial institutions to support local state-owned enterprises to purchase unsold commercial housing at a reasonable price for use as allocated or rented affordable housing according to market-oriented and rule-of-law principles, which is expected to drive 500 billion yuan in bank loans.

At present, market institutions estimate that the funds needed for China's housing inventory reduction are between 1 trillion yuan and 5 trillion yuan, while the announced affordable housing reloan and the total amount of leveraged bank loans are 800 billion yuan.By the end of October 2023, Meng Xiaosu, former head of the national housing reform project group and known as the "Father of China's Affordable Housing," suggested in an interview with Huaxia Times that in the new round of "housing reform," the state could increase fiscal investment by issuing national bonds, massively constructing affordable housing, and ensuring that various types of affordable housing benefit about 50% of urban families in major cities. He also proposed that the sale price of property-type affordable housing in large cities should be around one-third of the price of commercial housing. At that time, Meng Xiaosu recommended the issuance of 10-year national bonds. The bonds issued for the construction of affordable housing are repayable, and during the debt period, the affordable housing can be sold or leased. Leased housing can be held through REITs, which can be used to repay the interest and principal of the national bonds.

In late October of the previous year, Meng Xiaosu analyzed that if the national finance invests 1 trillion yuan annually, while requiring local governments to match the funding, and further expanding financing through financial institutions such as insurance, banks, and trusts, an investment scale of 5 trillion yuan could be achieved. Affordable housing does not collect land transfer fees, only land costs and basic taxes, so the 5 trillion yuan can all be used for housing construction, which can have an effect equivalent to an investment of 10 trillion yuan, and can quickly provide affordable housing on a large scale.

The Central Political Bureau meeting held at the end of April this year emphasized the continuous prevention and resolution of risks in key areas. The meeting proposed to study and digest the policies and measures for the supply and demand relationship of the real estate market and the new expectations of the people for high-quality housing, and to urgently build a new model for the development of the real estate industry to promote high-quality development of real estate. It is necessary to deeply implement the local government debt risk resolution plan to ensure that provinces and cities with high debt risks can truly reduce debt while maintaining stable development.

According to the latest research report from Goldman Sachs, ten cities or regions, including Chongqing, Zhengzhou, and Suzhou, have adopted the repurchase and storage model. The repurchase and storage model refers to the government taking the lead in setting up a housing security bank, purchasing existing stock housing from urban investment companies for use as affordable housing. Some local governments have also combined this "old for new" policy plan with urban village renovation and housing vouchers. The characteristic of this model is that it does not need to go through the replacement of the owners, and it also eliminates the process of rebuilding the houses, which can be put into use more quickly and reduce inventory.

On May 16th, the government of the Dali Bai Autonomous Prefecture in Yunnan issued the "Implementation Opinions on Further Promoting the Stable and Healthy Development of the Real Estate Industry (Trial)," encouraging the purchase of existing housing as affordable rental housing or talent housing. For counties and cities with a residential commercial housing inventory period exceeding 24 months, and the Dali Economic Development Zone, except for internal supporting facilities in industrial parks and towns far from the county town (main urban area), no new affordable rental housing will be built. Support is provided for private real estate companies to jointly establish affordable housing operation companies with state-owned enterprises.

On May 14th, the Housing and Urban-Rural Development Bureau of Lin'an District in Hangzhou issued an announcement to purchase a batch of commercial housing for public rental housing. The basic conditions for the housing sources are as follows: ① The housing sources are taken as the basic acquisition unit in whole buildings, and the single set of building area does not exceed 70 square meters; ② The acquisition of housing sources needs to be matched with a certain proportion of parking spaces, and the number of parking spaces for sale meets the matching conditions. The highest limit for this purchase is not to exceed the assessed price of the surrounding housing and parking spaces, and the final implementation is based on the "Specific Implementation Plan for Purchasing Commercial Housing for Public Rental Housing" approved by the district government.

At the end of March this year, Lou Jiwei, the former Minister of Finance, pointed out in a public speech that since the second half of 2021, some places have seen risks in real estate, local debt, and small and medium financial institutions. At the same time, local land transfer income is also declining, and these phenomena are interrelated, indicating the existence of medium and long-term structural problems. Specifically, the conversion of rural collective land to urban construction land requires urban investment companies to be responsible for land expropriation and demolition, converting the land into state-owned land, and then auctioning it to real estate developers in the form of "seven maps and one sign." Local governments can obtain the net income from land transfer. Banks have issued a large number of loans with land as collateral.

Lou Jiwei pointed out that in 2023, the Central Economic Work Conference proposed the requirement to accelerate the construction of a new model for real estate development, with the core being to break the urban-rural dual structure. This requires a unified understanding across all regions and departments, increasing the proportion of central finance, and providing fair basic public services. The current policy mainly focuses on gradually improving the real estate market conditions, avoiding systemic crises, and accelerating the promotion of fundamental structural reforms to build a unified urban-rural market, and promote high-quality economic development and social fairness and justice.