China’s burst of local bond issuance to pay for infrastructure and support the flagging economy is being hampered by a lack of available projects and the negative effect it’s having on private sector funding.

Earlier this year, central government attempted to counter the economic slowdown by ordering the accelerated sale of special infrastructure bonds, and provincial authorities have responded enthusiastically: A flurry of sales in August and September means that 92 percent of the 1.35 trillion yuan target for the year had been sold by the end of last month.

However, about 42 percent of the total special bonds sold since August are earmarked for “land reserves,” which means compensating farmers for acquisitions or preparing the acreage future development, according to the analysis of bond data by Bloomberg News. In short, the Economic Boost of the Debt Creation will be less than if it was used to build highways or redevelop sub-standard housing. ..

The sudden surge in such Debt sold into the market has also had an indirect crowding-out impact — yields on other forms of government bonds have risen, in turn pushing up those on corporate debt. As China seeks to buffer the domestic economy and shield it from the trade war with the U.S., the difficulties around the bond program heighten the chances the nation will just increase indebtedness without stoking growth.

Land reserve bonds are favored because local officials don’t have enough projects in the pipeline when they’re being asked to speed up spending,” said Nie Wen, a Shanghai-based economist at Huabao Trust Co. “The direct impact on investment is limited,” he said. “If other funding channels for local governments remain tightly controlled, special bonds alone won’t be enough to restore growth.”

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