Xi steps up economic aid with new debt issuance, PBOC visit

The legislature on Tuesday wrapped a days-long meeting where it also ousted Li Shangfu as defence minister two months after he disappeared from public view, and stripped former foreign minister Qin Gang of his remaining role as State Councillor. Adding to the series of high-profile reshuffles, the Standing Committee appointed Lan Fo’an as finance minister to succeed Liu Kun, a widely expected move.

Challenges likely to persist

The budget revision underlined concerns among top leadership about the economy’s outlook into next year and the government’s increased focus on shoring up the economy and financial markets. Earlier in the day, Mr Xi made his first known visit to the nation’s central bank since he became president a decade ago.

Chinese policymakers were considering raising this year’s budget deficit and issuing additional sovereign debt to help reach an official government growth goal of about 5 per cent for 2023, media reports said earlier this month.

Citigroup’s economists at the time said a move beyond the usual debt-to-GDP target “could show a greater sense of urgency of the policymakers” as they push to reach that growth goal.

Since then, stronger-than-expected third-quarter economic reports led authorities to say they were “very confident” in the economy’s ability to hit that target this year. Several challenges are likely to persist into 2024 though, including problems stemming from ongoing property market turmoil and deflationary pressures. Economists expect growth to slow to 4.5 per cent next year.

“Relevant authorities should make preparations for the sovereign bond issuance and projects in an active and orderly manner to ensure every penny is managed and used appropriately,” said Zhao Leji, chairman of the Standing Committee.

The 1 trillion yuan worth of special bond issuance to fund post-disaster reconstruction amounts to additional fiscal stimulus of about 0.8 per cent of GDP, said Duncan Wrigley, chief China economist at Pantheon Macroeconomics. He said the aim was to prop up China’s recovery going into 2024 against headwinds from falling property construction and exports.

Central government steps forward

Financing infrastructure investment through sovereign bond issuance may also reflect a shift in policy thinking by putting more of the fiscal burden on the central government, rather than local authorities who are running out of room to leverage up. The central government will transfer funds from the additional borrowing to local authorities to use in projects this year and next, according to Tuesday’s announcement.

Legislators also renewed through 2027 an authorisation for the State Council, China’s cabinet, to front-load some of next year’s local bond quota. Zhao urged for an acceleration in the issuance new local government notes and the use of the funds raised.

Beijing has shown increasing resolve to aid local governments with fiscal problems: Last month, it kicked off a program to allow struggling regional authorities to swap high-interest off-balance-sheet borrowing for lower-interest bonds.

In a weekend report to the Standing Committee, People’s Bank of China Governor Pan Gongsheng vowed to make policy “more” targeted and forceful. Pan also underscored a longer-term view on the economy while indicating easing is still on the cards, saying that policy would make good counter-cyclical and cross-cyclical adjustments.

Bloomberg