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China’s vice finance minister, Zhu Zhongming, emphasized the role of China’s new sovereign bonds in strengthening the economic recovery as the government escalates fiscal stimulus, resulting in a notable increase in its budget deficit. The move comes as China seeks to address the aftermath of this year’s floods and enhance urban infrastructure to better withstand future disasters, as approved by China’s top parliamentary body.
Boosting Domestic Demand: Zhu expressed that the utilization of treasury bond funds will not only help stimulate domestic demand but also contribute to consolidating the ongoing economic recovery. This is particularly significant as China has exceeded growth expectations in the third quarter, raising hopes of achieving its 2023 growth target of around 5%. Nevertheless, challenges persist, with the troubled property sector casting a shadow on the nation’s economic prospects.
Budget Deficit Expansion: In a relatively rare decision, China has substantially increased its 2023 budget deficit to approximately 3.8% of the gross domestic product (GDP), up from the initial 3%, due to the elevation in central government debt. This change sets the stage for an infusion of fiscal stimulus to fortify the economic rebound, although concerns have been raised about reverting to debt-funded stimulus and its potential impact on China’s transition to a consumer-led growth model.
Mixed Analyst Views: Not all analysts are convinced that the new debt issuance will have an immediate and substantial positive impact on the economy. Some, like Ting Lu, Chief China Economist at Nomura, believe that the fiscal multiplier effects from water conservancy projects may be limited. Consequently, they caution against overestimating the near-term economic influence of the additional 1 trillion yuan in Chinese government bonds (CGBs).
Controlled Pace and Spending Alignment: Zhu highlighted that China will prudently determine the pace of bond issuance, aligning it with spending needs. Additionally, authorities will implement measures to prevent misuses of bond funds. The government’s debt level is asserted to remain within a reasonable range, although specific details were not disclosed.
Room for Central Government Spending: Some policy advisers argue that the central government has ample room to increase spending, as its debt-to-GDP ratio stands at just 21%, significantly lower than the 76% ratio for local governments.
Phased Utilization: The funds procured through the bond issuance will be split, with half allocated for expenditure this year and the remaining half for next year. This phased approach aims to ensure effective utilization and alignment with China’s economic objectives.
Future Expectations: UBS analysts anticipate further increases in the budget deficit and special local bond quotas for 2024, accompanied by potential interest rate reductions and adjustments to bank reserve requirement ratios. Moreover, China’s parliament has authorized local governments to front-load a portion of their 2024 local bond quotas, providing flexibility to finance infrastructure initiatives.
Local Government Bond Issuance: Local governments were directed to complete the issuance of the 2023 quota of 3.8 trillion yuan in special local bonds by September to fund critical infrastructure projects.
China’s economic landscape remains dynamic, with policymakers adapting to address ongoing challenges and opportunities.
