China boosts support for economy with new debt issuance

The Chinese central government said it will issue an additional one trillion yuan ($137 billion) in government bonds in the fourth quarter to support the economy.

The country’s legislature approved the plan proposed by the State Council on October 24, news agency Xinhua reported.

Funds raised from the bonds will be used for rebuilding disaster-hit areas and flood prevention projects.

The central government will transfer the proceeds to local governments, with 500 billion yuan to be spent this year and the remaining 500 billion yuan earmarked for next year.

The plan will widen the country’s budget deficit for 2023 from 3% to around 3.8% of GDP.

It is rare for the central government to expand its annual budget mid-year. It previously did so during the Asian financial crisis in the late 1990s. The government also approved the issuance of a trillion yuan worth of special bonds for pandemic relief in 2020, but it did not include the debt officially in its budget.

Michelle Lam, Greater China economist at Societe Generale, said the central government is recognising that it has to provide stronger support to sustain China’s nascent recovery momentum.

Local governments have suffered from falling revenues with land sales diminishing and are unable to boost the economy alone, she said in a note. With the outlook for the property sector remaining dim, Lam said it is likely that local governments would fail to balance their budgets. In this case, the issuance of the special bonds would be aimed at “plugging the gap”, the economist said.

The new measure may also indicate policy-makers’ greater willingness to ramp up direct support for the economy, as well as their acknowledgement that local governments have limited fiscal capacity, she said. The analyst says the new measure may help improve China’s GDP in 2023 and 2024.

China’s GDP in the third quarter grew 4.9% year on year, beating market expectations, though slowing from an annual growth rate of 6.3% in the previous quarter. Authorities have set the GDP growth target for 2023 at around 5%.

The legislature also renewed an arrangement allowing local governments to front-load their annual bond quota until 2027. The measure is aimed at accelerating the issuance of local government bonds and meeting their funding needs for major projects.

However, Reuters reported today (October 25) that the State Council has restricted the ability of local governments in 12 highly indebted regions to take on new debt. Authorities have also placed limits on what new state-funded projects they can launch.

The 12 regions include seven provinces, including Liaoning, Jilin, Guizhou and Yunnan, as well as three of China’s five autonomous regions and the province-level cities of Tianjin and Chongqing.

The local governments will only be allowed to take on debt to fund major projects approved by the State Council as well as a few types of projects in key areas. Those projects include the redevelopment of urban neighbourhoods and building affordable housing, according to sources cited by Reuters. Projects such as new railway stations and power plants will not be permitted.

The funding restrictions on high-risk areas, along with the central government’s plan to issue special bonds, suggest policy-makers are seeking to balance the need to defuse local debt risks while providing support for the economy.

‘Unprecedented visit’ to PBoC

Meanwhile, Chinese president Xi Jinping reportedly made his first known visit to the People’s Bank of China since he became president in 2013, according to sources quoted by Bloomberg. Previous inspections were often led by the country’s premiers or their deputies.

Xi, vice-premier He Lifeng and other government officials visited the PBoC and the State Administration of Foreign Exchange in Beijing on October 24. The vice premier also visited the China Investment Corp, the country’s sovereign wealth fund.

While the details of the visits were not immediately clear, one source said Xi’s visit to the foreign exchange regulator was partly aimed at better understanding China’s $3 trillion of currency reserves.

New finance minister

On October 24, the legislature also appointed Lan Foan as finance minister, state media reported. He replaces Liu Kun, who had been finance minister since 2018 and has surpassed the official retirement age of 65 for minister-level officials.

Lan’s appointment became widely expected after he was named the Communist party chief at the finance ministry last month.

The post of finance minister is less powerful in China than in other major economies. Lan is not a member of the Politburo, a group of the Communist party’s top 24 officials. Lan is expected to tackle the country’s growing local debt risks in his new role.

The 61-year-old was previously the party chief of the northern Shanxi province.