Why China’s 1 trillion yuan debt plan isn’t necessarily such a big deal

Real Estate

A clerk of ICBC bank counts Chinese 100 yuan at its branch in Beijing.
Kim Kyung-Hoon | Reuters

BEIJING — Chinese authorities late Tuesday announced one of the biggest changes to the national budget in years, along with the issuance of 1 trillion yuan in ($137 billion) in government bonds.

But state media made it clear that whopping amount would be focused on reconstruction of areas hit hard by natural disasters — such as this summer’s historic floods — and for catastrophe prevention.

“The sheer amount of 1 trillion is not that significant, certainly not a game changer,” Larry Hu, chief China economist at Macquarie, said in an email. “But it’s still a modest positive surprise, as it’s not anticipated by the market.” 

The Hang Seng Index climbed more than 2% in morning trade Wednesday, and back above the psychologically key 17,000 level. Major mainland China stock indexes were up broadly.

Both Hong Kong and mainland Chinese stocks have fallen so far this year amid China’s lackluster recovery from the pandemic.

“We believe the economic impact of this RMB1.0trn in additional [central government bonds] should not be overstated, especially in the near term,” Nomura’s chief China economist Ting Lu said in a note.

He said he doesn’t expect much of the funds to be used until next year, or even in the next two or three years. That’s because most of the natural disasters this year hit China’s northern region over the summer, and the country is now heading toward the winter months, he said.

Chinese state media said the 1 trillion yuan in central government issuance is set to be transferred to local governments in two parts, half for this year and half for next year.

“The overall size of the additional funding does not appear to be sizeable relative to the local government’s funding base,” said Rain Yin, associate director at S&P Global Ratings.

“It is roughly around 5% of transfer revenues or 2% of total revenues for the local governments,” Yin said. “However, this funding could be crucial and meaningful in supporting selective provinces, especially in regions that have suffered from disasters and have needed to resort to more borrowings to support local economic recovery and development.”

The economy remains on track for Beijing’s target of around 5% growth this year, but that’s 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 add central government spending include: (1) supporting the completion of new homes that were pre-sold by developers and (2) stepping up infrastructure spending in cities with rising populations,” Nomura’s Lu said.

Property market drag

S&P Global Ratings said in a separate report Monday that if real estate sales drop dramatically next year, real gross domestic product growth will fall to 2.9% in 2024. The firm currently predicts a more modest 5% decline in property sales next year — after an anticipated 10% to 15% drop this year.

After easing a crackdown on property developers’ high reliance on debt for growth, Beijing has focused on ensuring the delivery of apartments, which are typically sold ahead of 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, S&P Global Ratings’ director of corporate ratings, said last week that the closest his team could get to understanding progress on completed properties is that the value of pre-sold homes at risk of non-delivery is 3 trillion yuan.

“These developers, they’re also struggling with their debt restructuring. They’re struggling with asset sales,” Tsang said in a phone interview.

“More or less they are having some progress,” he said. “But delay or one or two players, they will have a delivery problem. That’s not a big surprise.”

Support for local governments

China’s property slump is closely tied to local government finances.

“According to [People’s Bank of China] data, the central government’s outstanding debt is currently about RMB27trn, while we estimate local governments owe an exceptional balance of RMB87trn, including both explicit and hidden debt,” Nomura’s Lu said.

“The property market collapse and the continued contraction in land sales revenue has exacerbated debt pressures on local governments, which has prompted Beijing to roll out a raft of measures to reduce the debt risks of local governments,” he said.

“Note a special program has already been started since October, allowing local governments to issue special refinancing bonds to swap their outstanding hidden debt. As of 24 October, 24 provincial governments have issued over RMB1.0trn in special refinancing bonds.”

Also on Tuesday, the central government said it formalized a process allowing local governments to borrow funds for the year ahead — starting in the preceding fourth quarter, according to an announcement published by state media.

Goldman Sachs analysts estimated the early issuance could be as much as 2.7 trillion yuan, based on prior government practice.

“Given this year’s special bond quota has been largely used up, policymakers do need to add additional local government debt quota to avoid a fiscal cliff,” Macquarie’s Hu said. 

“Overall, I think fiscal policy has turned more supportive since this August. It’s a major shift from the conservative fiscal stance earlier this year.” 

Tuesday’s announcements come ahead of widely expected central government meetings in coming weeks about financial regulation and economic policy.

Among major government personnel changes announced Tuesday, Chinese state media said Lan Fo’an would replace Liu Kun as Minister of Finance.

“With the new finance minister and PBoC governor in place, fiscal policy execution will likely become more effective ahead, and fiscal-monetary policy coordination could also improve,” Xiangrong Yu, chief China economist at Citi, said in a note.

He noted the severity of recent natural disasters doesn’t compare with the recent pandemic or the Sichuan earthquake in 2008, indicating that Beijing’s decision to issue 1 trillion yuan in debt means “the intention to boost growth and confidence was evident.”

“In light of the renewed policy push, we perhaps need to take the risk scenario of keeping the 2024 GDP target ~5% seriously vs. the ~4.5% commonly assumed,” Yu said.

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