- Chinese authorities late Tuesday announced one of the biggest changes to the national budget in years, along with the issuance of 1 trillion yuan ($137 billion) in government bonds.
- State media made it clear that a huge amount would go toward rebuilding areas hit hard by natural disasters, such as this summer’s historic floods.
- “We believe the economic impact of this RMB 1.0 trillion will be additional.” [central government bonds] should not be overestimated, especially in the short term,” Ting Lu, chief China economist at Nomura, said in a note.
An ICBC Bank employee counts 100 Chinese yuan at its Beijing branch.
Kim Kyung-Hoon | Portal
BEIJING – Chinese authorities announced late Tuesday one of the biggest changes to the national budget in years, along with the issuance of 1 trillion yuan ($137 billion) in government bonds.
However, state media made it clear that a large amount would be used for reconstruction of areas affected by natural disasters – such as this summer’s historic floods – and for disaster prevention.
“The mere amount of 1 trillion is not that significant and certainly not groundbreaking,” Larry Hu, chief China economist at Macquarie, said in an email. “But it is still a modest positive surprise as it is not expected by the market.”
The Hang Seng Index climbed more than 2% in morning trade on Wednesday, rising back above the psychologically important 17,000 mark. The main stock indices in mainland China rose across the board.
Stocks in both Hong Kong and mainland China have fallen so far this year due to China’s sluggish recovery from the pandemic.
“We believe the economic impact of this RMB 1.0 trillion will be additional.” [central government bonds] should not be overestimated, especially in the short term,” Ting Lu, chief China economist at Nomura, said in a note.
He said he doesn’t expect much of the funding to be used until next year or even the next two or three years. That’s because most natural disasters this year hit China’s northern region in the summer and the country is now heading into the winter months, he said.
Chinese state media said the 1 trillion yuan to be spent by the central government will be transferred to local governments in two parts, half for this year and the other half for next year.
“The total amount of additional funding does not appear to be large compared to the local government’s funding base,” said Rain Yin, deputy director at S&P Global Ratings.
“It’s about 5% of transfer revenue or 2% of local governments’ total revenue,” Yin said. “However, this funding could be critical and useful to support select provinces, particularly in regions that have suffered from disasters and have needed to access more credit to support local economic recovery and development.”
The economy remains on track to meet Beijing’s growth target of around 5% this year, but is below more optimistic forecasts at the start of 2023. The International Monetary Fund this month also cut its forecast for China’s growth in 2024 to 4.2% .
“In our view, more efficient ways to increase central government spending include (1) supporting the completion of new homes pre-sold by developers and (2) increasing infrastructure spending in cities with increasing populations,” said Lu from Nomura.
S&P Global Ratings said in a separate report on Monday that real gross domestic product growth will fall to 2.9% next year as home sales fall sharply next year. The company currently forecasts a more modest 5% decline in home sales next year – after a 10% to 15% decline expected this year.
After easing a crackdown on the heavy reliance of real estate developers who rely on debt to grow, Beijing has focused on ensuring the delivery of apartments that are typically sold before completion in China.
About 80% of residential sales in 2023 were of homes still under construction, S&P Global Ratings said in a report this month.
But Ricky Tsang, director of corporate ratings at S&P Global Ratings, said last week that his team could get closest to making progress on completed properties when the value of pre-sold homes at risk of non-delivery hits 3 trillion yuan.
“These developers are also struggling with debt restructuring. They are struggling with asset sales,” Tsang said in a telephone interview.
“They are making more or less progress,” he said. “But if one or two players are delayed, they will have a delivery problem. That’s not a big surprise.”
China’s real estate collapse is closely linked to local government finances.
“Accordingly [People’s Bank of China] “According to data, the central government’s outstanding debt currently stands at around RMB 27 trillion, while we estimate that local governments owe an extraordinary balance of RMB 87 trillion, including explicit and hidden debt,” Nomura’s Lu said.
“The collapse of the real estate market and the continued decline in revenue from land sales have increased debt pressure on local governments, prompting Beijing to take a series of measures to reduce local governments’ debt risks,” he said.
“Note that since October, a special program has already been launched that allows local governments to issue special refinancing bonds to exchange their outstanding hidden debts. As of October 24, 24 provincial governments have issued special refinancing bonds worth over RMB 1.0 trillion.”
Also on Tuesday, the central government said it had formalized a process allowing local governments to borrow for the coming year – starting with the previous fourth quarter, according to an announcement carried by state media.
Analysts at Goldman Sachs estimated that early issuance could be as high as 2.7 trillion yuan based on past government practices.
“With this year’s special bond ratio largely exhausted, policymakers actually need to add an additional debt ratio for local governments to avoid a fiscal cliff,” Macquarie’s Hu said.
“Overall, I think fiscal policy has become more supportive since this August. This is a significant departure from the conservative fiscal policy at the beginning of this year.”
Tuesday’s announcements come ahead of widely expected central government meetings in the coming weeks on financial regulation and economic policy.
Among the major personnel changes in the government announced on Tuesday, Chinese state media said Lan Fo’an would replace Liu Kun as finance minister.
“With the new finance minister and PBoC governor, fiscal policy implementation is likely to become more effective in the future, and fiscal and monetary policy coordination may also improve,” Xiangrong Yu, chief China economist at Citi, said in a note.
He noted that the severity of recent natural disasters is not comparable to the recent pandemic or the 2008 Sichuan earthquake, pointing out that Beijing’s decision to issue 1 trillion yuan of debt means that “the intention “To strengthen growth and trust was obvious”.
“With the renewed policy push, we may need to take seriously the risk scenario of keeping the 2024 GDP target at around 5%, as opposed to the around 4.5% generally assumed,” Yu said.