China Moves to Add Fiscal-Stimulus Space After Weak Data

China is looking to increase the amount local governments can borrow, state media reported, as the government seeks to boost an economic recovery that remains fragile due to weak domestic demand.

(Bloomberg) — China is looking to increase the amount local governments can borrow, state media reported, as the government seeks to boost an economic recovery that remains fragile due to weak domestic demand. 

The Standing Committee of the National People’s Congress (NPC) — the Communist Party-controlled parliament that oversees government borrowing — will meet later this month to review a bill assigning additional local government debt quotas “in advance,” the state-run Xinhua News Agency reported Friday.

Such a move could boost government spending later this year, or early in 2024. Economists see the latter option as more likely, with China previously letting local governments issue bonds in January and February ahead of the government’s budget, which sets debt issuance limits for local authorities and is usually approved in March. 

The report came after official data showed China’s consumer inflation slowed to zero in September, suggesting weak overall demand in the economy. Loan growth by Chinese banks also fell year-on-year in September, data from the People’s Bank of China showed. 

China’s premier Li Qiang on Friday called for “more powerful and effective” implementation of economic policy and said the government will strengthen research towards creating a reserve of potential policies that could be used later, without giving details. The country has laid a “solid foundation” to meet its annual economic targets, he added at a meeting with economists and business executives.

The NPC’s legal authorization to allow advance bond issuance expired at the end of 2022, meaning it needs to pass another bill if it wants to assign quotas ahead of time for local government bonds that would be issued early next year. The NPC standing committee, which has the authority to approve legislation, will meet Oct. 20-24, Xinhua said.

“Most likely it signals that local governments will start issuing special bonds in January-February, rather than as usual after the March budget. This has happened a couple of times before, when China feels a fiscal boost is needed in the first quarter,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics.

Offering Flexibility

The move could also give Beijing a legal basis for additional local bond issuance even earlier than January, if it thinks that a fiscal boost is needed. Local governments were told to issue their entire quota of “special purpose” bonds — mainly used for infrastructure investment — by the end of September, leaving doubts about how much fiscal stimulus would be funded toward the end of this year.

“In theory, pre-assigning local debt quotas gives flexibility, so that if Beijing decides a further boost is needed in November, say, it could direct local governments to begin issuance in December. This has never happened before,” Wrigley added.

An alternative option for Beijing to add stimulus this year would be to allow local governments to tap unused bond quotas left over from previous year’s budget, according to economists. Beijing could also instruct policy banks to support local infrastructure spending, as happened last year.

China’s government accumulated about 3.4 trillion yuan ($465 billion) of unspent government bond issuance quotas at end of 2022, with 800 billion yuan assigned to the central government and 2.6 trillion to local governments, economists at Goldman Sachs Group Inc. estimate.

Although some of that unused local government quota has already been tapped this year, Goldman economists estimate 500 billion yuan of “special purpose” bonds used mainly for infrastructure could be issued in the remainder of this year — in addition to more policy bank financing support.

Although economists generally believe China will meet its gross domestic product growth target of about 5% for this year, Beijing has been widely expected to increase fiscal stimulus. The property market slump and weak consumer confidence continue to drag on growth. 

National Budget

Bloomberg News reported earlier this week that Beijing was considering revising its budget to allow the issuance of more sovereign bonds, which would be an unusual move. Allowing local governments to use some of 2024’s debt quota in advance could allow for more bond issuance this year, without revising this year’s budget.

Government bond issuance has been a key driver of credit growth in recent months. China’s central bank has lowered bank reserve requirements, in a move analysts said was to help absorb a large supply of local government bonds.

Economists have increasingly called for China’s central government to issue more debt, in a change to the model of relying on local government leverage to provide fiscal support. That’s because a multi-year property downturn has hit the ability of local governments to service their existing obligations, while China’s central government leverage is lower than other major economies, and it borrows at lower rates than regional authorities.

(Updates with comment from China’s premier in fifth paragraph, chart of data and comments from Goldman Sachs economists.)

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