China’s fiscal revision, including a 1 trillion yuan (US$137 billion) sovereign debt plan, was aimed at ensuring economic stability in the coming months amid a faltering property market and rising local government debt pressure, analysts said.
The new issuance, approved by the National People’s Congress on Tuesday, will raise the budget deficit ratio to about 3.8 per cent of gross domestic product (GDP) – well above the 3 per cent target set in March, which was widely considered as a red line.
Finance vice-minister Zhu Zhongming said the sovereign debt issuance was aimed at supporting reconstruction and improving disaster prevention and relief capabilities.
The nation’s legislature also passed a bill to allow local governments to front-load part of their 2024 bond quota to “maintain steady investment, expand domestic demand and strengthen weak links”, the official Xinhua News Agency reported on Tuesday.
“[Raising the on-budget fiscal deficit ratio] suggests Beijing may not be complacent with recent growth stabilisation and may have become more willing to add more debt, especially on-budget government debt, as local government’s off-budget borrowings have become increasingly unsustainable,” Japanese investment bank Nomura said on Wednesday.
The funds from the sovereign debt sale would be transferred to local governments, with the central government responsible for the principal and interest payments to ensure there is no additional debt burden on local authorities, Zhu said.
“It is to make up for shortcomings, strengthen down the road, and protect people’s livelihood,” he said on Wednesday.
“Of course, after the treasury bond funds are put into use, objectively it will also help drive domestic demand and further consolidate the recovery of the economy.”
Local governments had already been told to complete the issuance of their 3.8 trillion yuan quota of special local bonds for 2023 by September to fund infrastructure projects.
However, the size of the front-loaded bond quota for 2024 has not been disclosed.
China has rarely revised its fiscal target, but the change signals Beijing has acknowledged that stronger policies may be required to stabilise growth next year, according to the Shanghai-based SWS Research.
“In addition, the Ministry of Finance has arranged the deficit ratio [revision] in 2023, leaving flexibility for fiscal adjustment of the economy in 2024,” SWS Research said on Tuesday.
However, confidence in the world’s second-largest economy remains weak as a result of a prolonged property downturn, while local governments are also under pressure from rising debt levels.
Revenues from land sales have plummeted after a series of defaults from some of the country’s largest developers, including Country Garden and Evergrande.
Government land sales revenue fell by 19.8 per cent in the first three quarters of the year, year on year, the Ministry of Finance said on Tuesday, compared to a fall of 15.2 per cent during the same period in 2022.
“For some time, a lack of confidence has restricted the expansion of economic activities, affecting investment and consumption,” said Luo Zhiheng, deputy dean and chief macroeconomic analyst at Yuekai Securities Research Institute on Tuesday.
Luo added that government bond sales would send a signal to investors that economic stability was a priority for Beijing.
The Economist Intelligence Unit (EIU) said that the additional sovereign debt is “an ad hoc move” to rebuild and upgrade water conservancy infrastructure.
“Still, it will carry positive implications for growth in 2023 and 2024.”
The EIU said it would revise its GDP growth forecast to between 5.5 and 5.4 per cent, reflecting the additional spending on public works, up from the 5.2 per cent predicted in July.
Additional reporting by Frank Chen