Detailed stimulus policies, including proactive fiscal expansion, are likely to be rolled out to address China’s local government debt issue and facilitate a steady economic recovery, as China’s top legislature is set to convene a highly anticipated session next month.
The Standing Committee of the 14th National People’s Congress will convene its 12th session from Nov 4 to 8 in Beijing, and analysts said the meeting is widely expected to flesh out details of the fiscal package, including a swap program for local government hidden debt, and sales of government bonds to inject capital into banks.
Vice-Minister of Finance Liao Min said during the World Bank’s 110th Development Committee meeting on Friday in Washington, DC, that China will leverage more fiscal firepower to strengthen its countercyclical adjustments.
Countercyclical adjustments are macroeconomic tools used to neutralize possible negative effects of economic cycles.
Liao said that details of China’s fiscal initiatives would be announced after the conclusion of the meeting of the NPC Standing Committee, as fiscal policy in China requires going through legislative procedures.
Through government spending, China aims to catalyze investment from the private sector and shore up consumer spending, thereby increasing effective demand, Liao said, adding that the country is confident of achieving its annual growth target of around 5 percent.
In October last year, China’s top legislature approved a plan to increase treasury bond issuance by 1 trillion yuan ($140 billion).
Moreover, earlier this month, Finance Minister Lan Fo’an said at a news conference that the central government plans to significantly increase the debt ceiling to conduct a one-time swap of local governments’ existing hidden debt.
This policy is the largest support measure introduced in recent years to aid the debt resolution process, and is pending legislative approval, Lan added.
Wang Qing, chief macroeconomic analyst at Golden Credit Rating International, said, “This means that the local government debt quota, currently at around 46.79 trillion yuan, will be raised substantially this year.”
The quota increase will pave the way for the issuance of large-scale special local government refinancing bonds in the fourth quarter, which is estimated to reach around 2 to 3 trillion yuan and will be used to swap out the existing hidden local debt. This process is unlikely to be slow, Wang added.
The government’s debt restructuring program has extended repayment periods and reduced financing costs, enabling local authorities to free up more funds for current economic development and public service provision, said Luo Zhiheng, chief economist at Yuekai Securities.
Furthermore, the easing of local government debt helps optimize the local business environment, which is a significant boon for foreign companies investing in China, Luo added.
Meanwhile, analysts said the current round of fiscal initiatives also includes measures to replenish bank capital, which will boost the lending and bond-purchasing abilities of large commercial banks, with the aim of driving these major banks to further enhance support for the real economy.
The volume of special treasury bonds issued to replenish the core tier 1 capital of State-owned commercial banks could potentially reach around 1 trillion yuan, said Wang of Golden Credit Rating International.
“As a result, new yuan-denominated loans in the fourth quarter are expected to reverse the previous trend of slowdown and return to a growth trajectory, which is an important focus area for the current economic stabilization efforts,” Wang added.
While Lan, the finance minister, has hinted at the considerable headroom the central government has to raise debt levels and increase the fiscal deficit, analysts said that increases in the government deficit and treasury bond issuance are likely to be outlined in next year’s Government Work Report.
Tao Chuan, chief economist at Minsheng Securities Research Institute, said that given the relatively slower pace of issuance of special treasury bonds and local government bonds at the moment, the current fiscal policy thinking is likely tilting more toward effectively utilizing existing policy tools and larger-scale equipment upgrades and consumer goods trade-ins.