China pledges fiscal measures to support economy, but details of new measures unclear at this time

BEIJING – There was no headline-grabbing figure on which investors who attended China’s finance minister’s Oct. 12 morning news conference were pinning their hopes.

Full of promises but few details, Mr. Lan Fo’an’s briefing to a room full of local and foreign journalists nevertheless brought some needed optimism by signaling the government’s intention to resuscitate an ailing economy and giving the assurance that it could develop if necessary.

Investors were expecting a major stimulus package from Beijing last week, likely to restore confidence and turn around a sluggish economy.

Their expectations were raised ahead of Golden Week, a week-long holiday that began on October 1, when authorities announced on September 24 a series of measures ranging from cutting interest rates and lowering currency reserves. Mandatory liquidity for banks to ease restrictions on housing to stimulate buying. , as well as support for the stock market.

But a well-attended news conference by the country’s top economic planner on Oct. 8 — after markets reopened after the holidays — was met with disappointment due to the lack of concrete plans. Stock markets reacted negatively to the event and failed to recover in the following days, following a rally that saw Chinese stocks jump 30 percent following policy announcements in late September.

On October 12, Lan said the central government would issue more bonds to help local governments pay debts and support low-income families. It will also help replenish the capital of state banks and stabilize the real estate market by allowing local governments to use special bonds to buy unused land or existing housing — steps that economists say are welcome.

“The central government still has quite a bit of room to borrow and increase the deficit,” Lan said.

China’s central government is struggling with local government debt, which has ballooned as local authorities rely on borrowing to finance infrastructure and development projects.

Much of this debt is hidden, as local government financing vehicles are used to circumvent borrowing limits. As these debts rise, they raise concerns about China’s debt sustainability and financial stability.

To ease debt pressure on local governments, there will be a one-off increase in the debt quota, which Lan said will be “one of the largest in recent years in terms of tackling risk debt”.

Worried investors will have to wait until later in October to learn details of some of these policies, such as the amount of bonds that will be issued, as they must be approved by the country’s top legislature.

“These policies are going in the right direction. To assess the impact of such policies on the macroeconomic outlook, we need to wait for details about these policies, such as their size and composition,” said Dr. Zhang Zhiwei, President and Chief Economist of Pinpoint Asset Management.

Ms Erica Tay, director of macro research at Maybank Singapore, said the move to relax the spending conditions for special local government bond products “addresses a key issue” as it “allows existing fiscal support to actually be spent” .

Some 3.9 trillion yuan ($720.2 billion) of these bonds were to be issued and used in 2024, but local governments were hamstrung because Beijing limited their use to restricted areas, such as railways, she added.

“With 2 trillion yuan of these funds unspent, easing spending conditions will actually boost real growth. »