SINGAPORE/SHANGHAI (Reuters) – China’s top legislative body on Friday approved a bill allowing local governments to issue 6 trillion yuan ($838.8 billion) worth of bonds to exchange for off-balance sheet debt or “hidden” debt for three years, as policymakers wanted to boost the sluggish economy.
The National People’s Congress (NPC) Standing Committee approved the bill at a meeting from November 4 to 8.
Finance Minister Lan Foan indicated that further stimulus measures are in the pipeline, but provided few details.
The local government could use an additional 4 trillion yuan of issuance already approved to finance the debt swaps aimed at reducing systemically important financial risks.
The announcement of local government support was largely in line with market expectations. Reuters had reported that authorities are considering a more than 10 trillion yuan ($1.4 trillion) plan to boost growth and help local governments tackle debt risks.
But investors had hoped for more measures to stimulate sluggish consumer and business demand.
QUOTES:
CARLOS CASANOVA, ASIA SENIOR ECONOMIST, UBP, HONG KONG
“We expected it to be more cautious or a more incremental stimulus package. We had a figure of 2 trillion yuan in mind, and I think it’s more or less in line with expectations if you take the time frame into account.
“It’s going to disappoint the market because China has more essential needs. We looked at the size of unsold housing stock plus the size of some of the LGFV bonds that are maturing. We estimate the actual size of the necessary package at around 23 trillion. That is 15% of GDP. We won’t achieve that. We’re going to have a more measured approach where they’ll spend smaller amounts over a three-year period.
“I don’t think we will see direct fiscal stimulus aimed at consumption anytime soon. I think you’re going to need a lot more pain to do that, and potentially that pain could come from some of the trade measures that Trump has announced so far. But we don’t know that yet.
“China will likely withhold some of that firepower until they have a better idea of what President Trump is planning. I have not revised my GDP growth forecast for 2024, so it remains unchanged at 4.8%, as it is quite late This year, fiscal stimulus takes time. But I have just revised my 2025 GDP forecast upwards from 4.5% to 4.7%.”
LYNN SONG, CHIEF ECONOMIST FOR GREATER CHINA, ING, HONG KONG
“The steps are in line with my expectations following the report you released last week. I think markets are on the disappointed side as there were rumors that policy could be bigger if Trump wins the US elections.
“That said, I don’t think there’s any need to be too pessimistic. This certainly does not mean the end of policy support, and once local governments are freed from current burdens, they will be better able to implement fiscal stimulus measures. It will take time, but next year’s fiscal stimulus should be significantly stronger.”
XING ZHAOPENG, SENIOR CHINA STRATEGIST, ANZ, SHANGHAI
“The lack of immediate fiscal stimulus suggests that policymakers would leave policy space for the impact of Trump 2.0 down the road. The GDP target for 2025 could be lowered to 4.5%.
“The CNY6 trillion local hidden debt swap is encouraging, but it is far from a solution to local debt risk and the amount seems too small. Leaders will need to accelerate the fiscal decentralization reform outlined in the Third Plenum to motivate local governments. The market will shift focus to the Politburo meeting and the central economic working conference in December 2024, where we expect there to be more growth-enhancing measures will be announced.”
HUANG XUEFENG, RESEARCH DIRECTOR AT SHANGHAI ANFANG PRIVATE FUND CO, SHANGHAI
“I don’t see anything that exceeds expectations. It’s not huge when you consider the budget deficits due to the economic slowdown and land sales slump. The money is used to replace hidden debts, meaning it doesn’t create new workflows. , so the support for GDP growth is not as direct.
“It is likely positive for the bond market as it will not provide a major boost to economic fundamentals and will also allay fears of a large supply of bonds in the near term.”
“This is very good news for banking stocks as it removes potential risks clouding the sector. Bank loans are the main source of capital for local government financial instruments, many of which are cash-strapped and could potentially torpedo banks’ balance sheets. The ministry’s moves to abolish local hidden debts ease investor concerns about the health of the banking sector. There is little reason to worry if you buy bank shares at current valuations.’
ZHIWEI ZHANG, CHIEF ECONOMIST, PINPOINT ASSET MANAGEMENT, HONG KONG
“I think the news from the press conference is positive for China’s macroeconomic outlook. The debt swap is an important policy measure that helps local governments alleviate their debt burden. This is expected by the market, but nevertheless the confirmation of such a policy is positive. Moreover, the Finance Minister said that fiscal policy will provide more support next year. This “forward guidance” is probably the most important message of the press conference.
“It is unrealistic to expect the government to announce details of next year’s fiscal stimulus measures at this meeting. A budget preparation process is underway after the government set the growth target during the central economic working conference in December. But this is not realistic. “Forward guidance” indicates that the government has likely already made the decision to increase the budget deficit next year.”
(Reporting by Samuel Shen in SHANGHAI, Rae Wee in SINGAPORE and Summer Zhen in HONG KONG; Editing by Kim Coghill)
