By Wei Hongxu
Recently in China, there has been heightened market attention on the proactive fiscal policy within the policy package. At a press conference on October 12, Finance Minister Lan Fo’an announced upcoming policy measures to enhance economic stability and support local governments. These initiatives include increasing debt quotas to manage risks and hidden liabilities, issuing special national bonds to help state-owned banks replenish their core tier-1 capital and boost credit availability, and utilizing various financial tools such as local government bonds, dedicated funding, and tax incentives to stabilize the real estate market. Additionally, there will be enhanced support for key groups. Lan also noted that beyond the four policies that have entered the decision-making process, other tools are under study, as the central government still has considerable room for borrowing and increasing the deficit, outlining the general framework of proactive fiscal policy.
Regarding the scale of fiscal stimulus that drew the market’s attention, the Ministry of Finance does not specify a concrete figure, explaining that the exact scale will only be determined after certain procedures are completed. Therefore, the intensity of the fiscal policy cannot be accurately assessed at this moment. However, since it does not include large-scale social welfare measures or consumer stimulus that some institutions expected, the overall scale is unlikely to reach the hundreds of billions as some have predicted, nor is it comparable to the “super easing policies” of Western countries. Additionally, the fact that the Ministry of Finance held this press conference without waiting for the procedures to be completed reflects the urgency of increasing macroeconomic support and highlights the policy department’s pressing need to improve market expectations.
Lan emphasized the resilience of China’s finances, asserting that the government can achieve a balanced budget and meet its annual targets through comprehensive measures. He indicated that the general budget gap may not be as large as some external estimates suggest and could be offset by annual surpluses or profits from state-owned enterprises. This suggests a minimal likelihood of expanding budget expenditures or increasing the general budget deficit. While he acknowledged that the central government has considerable capacity for borrowing and deficit enhancement, there is currently no necessity to do so. As predicted by ANBOUND, the Ministry of Finance’s incremental policies will not expand the budget scale. Rather, they will primarily draw from special national and local bonds, indicating a reliance on resources outside the general fiscal budget. These measures are designed as short-term counter-cyclical adjustments to address the current economic conditions rather than as standard arrangements.
These policies certainly will have a positive impact on the country’s economic stability and growth. Issuing special national bonds to supplement the capital of large banks can expand overall credit support for the real economy through the banking system, effectively leveraging financial resources. In addition, this will enhance the risk protection capacity of financial institutions, thus playing a role in risk prevention. Using special bonds to acquire land and provide affordable housing will stabilize the local land market and help troubled real estate companies clear their existing land inventory, contributing to the stabilization of the real estate market. Increasing local special bond quotas to replace hidden debts may help local governments reduce interest expenses, extend debt maturities, and alleviate broader fiscal pressures, freeing up resources for development and social welfare. Nevertheless, considering the approval and issuance processes for special national bonds and local special bonds, these policies may take some time to be fully effective, likely not until next year.
Regarding the issuance of ultra-long-term special national bonds, the information currently disclosed indicates that the incremental amount will be used to supplement the capital of large commercial banks, and this approach has precedent. Furthermore, ultra-long-term special national bonds should not be constrained by the national debt limit. However, the overall scale is unlikely to increase significantly, remaining around RMB 1 trillion. As of the end of September, the issuance of ultra-long-term special national bonds totaled RMB 750 billion, completing three-quarters of the annual quota. According to the plan, these bonds are expected to be fully issued by November 16. Given the normal issuance of national bonds, it will be challenging to complete the issuance of additional ultra-long-term special national bonds within just two months. Additionally, considering the procedures and processes for fundraising and capital injection, it may take more time for the capital to be in place and truly leverage financial resources.
The special bonds mentioned by the Ministry of Finance, which are intended for land reserves and the acquisition of affordable housing, involve issues related to project application and approval. Considering that this year’s issuance of special bonds is nearing completion, it will be challenging to make an impact within the year if the use of funds cannot be altered. Furthermore, within the conventional limits of special bonds, the potential for additional issuance is limited. More likely, there will be structural adjustments, with incremental special bond funds being prioritized for real estate-related sectors, while other projects, such as infrastructure, may need to be adjusted and scaled back. This presents decisions that local governments will need to confront.
For local finances, the most significant benefit of the incremental policy is that it helps address the burden of hidden debt resolution. Lan stated that to alleviate the debt burden on local governments, other than continuing to allocate a certain scale of bonds each year within the new special bond quota to support the resolution of existing government investment project debts, there are plans to make a one-time large-scale increase in debt quotas to replace local governments’ hidden debts, thereby intensifying support for local debt risk mitigation. Relevant policies will be thoroughly explained to the public after legal procedures are completed. He specifically emphasized, “It is important to note that this upcoming policy is the most significant measure to support debt resolution introduced in recent years. It is undoubtedly a timely policy boost that will greatly reduce the debt pressure on local governments.” However, issuing special bonds to replace hidden debts merely converts “hidden debts into visible ones” and does not constitute debt reduction or a central government “safety net”. While it extends the duration of debt and alleviates immediate repayment pressures, it will also significantly lower local governments’ debt costs, saving them substantial interest expenses.
In terms of the scale of debt restructuring, for comparison, the issuance of replacement bonds exceeded RMB 12 trillion from 2015 to 2018. Under the debt restructuring plan from the Politburo meeting in July 2023, RMB 1.39 trillion of special refinancing bonds were issued by 28 provinces and cities nationwide in the fourth quarter of 2023 to repay existing debts. Considering that the one-time debt restructuring has the greatest impact, the scale of this round of debt restructuring is still worth looking forward to. This may indicate that the scale of local government debt exceeds the prescribed limits. Such a contradiction may also require unique treatment. Additionally, in the near future, the proportion of refinancing bonds in new local government bonds will significantly increase, though when one considers the issue of limits, other projects are likely to be affected as well. Debt replacement will be a key focus for local finance to address in the coming years.
This round of fiscal policy has been introduced to address a notable decline in overall fiscal revenues and expenditures. Its primary objectives are to stabilize finances, enhance the real estate market, and alleviate local government debt pressures, all while maintaining demand and expectations. In the long term, the scale and scope of ultra-long-term special government bonds could significantly influence future fiscal policy.
With the central bank begins purchasing government bonds as a monetary policy tool, there will need to be coordination between bond issuance and central bank actions. Additionally, there is an urgent need for reforms in taxation and government debt management. The strategy for tackling local government debt risks will continue to prioritize a comprehensive debt restructuring plan designed to reduce debt burdens and support the transformation of local financing platforms. Crucially, the incremental measures in this fiscal policy align with the central government’s focus on high-quality development and structural adjustments. The goal is to achieve a soft landing rather than a return to rapid growth. The emphasis remains on filling the gaps, as highlighted by ANBOUND previously. At the same time, there is the need for consistent and sustainable policy implementation.
Promoting high-quality development involves a balancing act of both building new systems and breaking down old ones. ANBOUND’s founder Kung Chan pointed out that the core of proactive fiscal policy is not just about how much funding is allocated, but rather guiding the direction of reform. However, at this point, proactive fiscal policy has yet to clearly define that direction.
Final analysis conclusion:
The Chinese Ministry of Finance has announced four targeted incremental measures to be implemented, which is a significant effort to promote counter-cyclical adjustments. This move reflects the urgency for China to enhance its macroeconomic support for the economy. Currently, the emphasis of fiscal policy enhancement is on what ANBOUND has previously predicted as filling the gaps. All in all, it is crucial to ensure that these policies are both consistent and sustainable.
- Wei Hongxu is a Senior Economist of China Macro-Economy Research Center at ANBOUND, an independent think tank.
