Xi steps up economic support with new debt issuance, PBOC visit
CHINESE President Xi Jinping stepped up support for the world’s second-biggest economy, issuing additional sovereign debt, raising the budget deficit ratio and even making an unprecedented visit to the central bank.
The nation’s legislature approved a plan to raise the fiscal deficit ratio to about 3.8 per cent of gross domestic product, the official Xinhua News Agency said on Tuesday (Oct 24) – well above the 3 per cent set in March widely considered a red line for the nation. The plan includes issuing additional sovereign debt worth one trillion yuan (S$189 billion) in the fourth quarter to support disaster relief and construction.
China has rarely adjusted the budget mid-year, having previously done so in periods including 2008, in the aftermath of the Sichuan earthquake and in the wake of the Asian financial crisis in the late 1990s.
The proposal was passed during a meeting of the Standing Committee of the National People’s Congress – the Communist Party-controlled parliament that oversees government borrowing – which ended on Tuesday. Earlier, in the day, Xi himself made his first known visit to the nation’s central bank since he became Chinese president a decade ago, emphasising the government’s increased focus on shoring up the economy and financial markets.
The moves underline concerns among top leadership about the economy’s outlook into next year. It follows a Bloomberg News report earlier this month that Chinese policymakers were considering raising this year’s budget deficit and issuing additional sovereign debt to help the nation’s reach an official government growth goal of about 5 per cent for 2023.
People familiar with the matter told Bloomberg then that the issuance of additional sovereign debt was under discussion for spending on infrastructure such as water conservancy projects. Citigroup 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 pushed to reach the year’s growth goal.
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Since then, stronger-than-expected data for the third quarter has led authorities to say they are “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,” state broadcaster CCTV cited Zhao Leji, chairman of the Standing Committee, as saying.
About one trillion yuan worth of additional infrastructure funding this year would be “necessary to ensure that infrastructure investment can continue to grow at its current pace”, Dinny McMahon, head of China markets research at consultancy Trivium China, said earlier this month. “Additional funds for infrastructure are necessary so that infrastructure investment doesn’t plunge in the last two months of the year.”
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.
Legislators also renewed 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 of 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 one trillion yuan programme to allow struggling regional authorities to swap high-interest off-balance-sheet borrowing for lower-interest bonds.
At the Standing Committee meeting, China also finalised several personnel decisions – including removing Li Shangfu as defence minister, the latest in a string of high-profile reshuffles. Beijing also named Lan Fo’an as finance minister to replace Liu Kun.
In a report to the Standing Committee over the weekend, People’s Bank of China (PBOC) 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
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