SINGAPORE/SHANGHAI (Reuters) – China top legislative body approved a bill on Friday to allow local governments to issue 6 trillion yuan ($838.8 billion) in bonds to swap for off-balance sheet or “hidden” debt over three years, as policymakers sought to spur the sluggish economy.
The standing committee of the National People’s Congress (NPC) approved the bill during a meeting from Nov. 4 to 8.
Finance Minister Lan Foan signalled further stimulus is in the pipeline, but gave few details.
Local government would be able to use another 4 trillion yuan in issuance that has already been approved to finance the debt swaps, aimed at reducing systemic financial risks.
The announcement of the local government aid was largely in line with market expectations. Reuters had reported authorities were considering a more than 10 trillion yuan ($1.4 trillion) plan to boost growth and help local governments address debt risks.
But investors had been hoping for more measures to boost sluggish consumer and corporate demand.
QUOTES:
CARLOS CASANOVA, ASIA SENIOR ECONOMIST, UBP, HONG KONG
“We were expecting 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 that you take into account the time frame.
“It is going to disappoint the market because China needs more essentially. We looked at the size of the unsold inventories of homes plus the size of some of the LGFV bonds that are maturing. We placed the actual size of the package needed around 23 trillion, which is 15% of GDP. We are not getting that. We’re getting a more measured approach where they’re going to issue smaller amounts over the 3 years.
“I don’t think that we will see direct fiscal stimulus aimed at consumption anytime soon. I think you will need a lot more pain for that to materialize and potentially that pain could stem from some of the trade measures that Trump has announced so far. But we don’t know that yet.
“China is probably going to hold back some of that fire power 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 fairly late in the year, fiscal stimulus takes time. However, I have just revised up my GDP forecast for 2025 to 4.7% from 4.5%.”
LYNN SONG, CHIEF ECONOMIST FOR GREATER CHINA, ING, HONG KONG
“The moves are in line with my expectations after the report you guys put out last week. I think markets are on the disappointed side as there were rumours that the policy could be larger if Trump won the U.S. election.
“With that said, I think there’s no need to be too pessimistic, this certainly does not mark the end of policy support, and once local governments are freed up from the current burdens, they will better be able to implement fiscal stimulus. It will take time but next year’s fiscal stimulus push should be considerably stronger.”
XING ZHAOPENG, SENIOR CHINA STRATEGIST, ANZ, SHANGHAI
“The lack of direct fiscal stimulus suggests that policymakers would leave policy room for the impact of Trump 2.0 later. 2025 GDP target may be downgraded to 4.5%.
“The CNY 6 trillion local hidden debt swap is encouraging, but it is far from a solution to the local debt risk and the amount looks too small. The leadership will have to accelerate the fiscal decentralisation reform outlined in the Third Plenum to motivate local governments. The market will shift focus to the Politburo meeting and central economic work conference in December 2024, where we expect more pro-growth measures to 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 if you look at the fiscal shortfalls due to the economic slowdown and land sales slump. The money is used to replace hidden debts, which means it doesn’t create new work flows, so the support to GDP growth is not that direct.
“It’s likely positive for the bond market, as it won’t give a big boost to economic fundamentals and also alleviates fears of massive bond supplies in the near term.”
DONG BAOZHEN, CHAIRMAN, LINGTONG SHENGTAI, BEIJING
“This is very good news for banking stocks, by removing potential risks clouding the sector. Bank lending is the main source of capital for local government financial vehicles, many of which are cash-strapped and could potentially torpedo banks’ balance sheet. The finance ministry’s measures to revolve local hidden debt removes investors’ concerns over the health of the banking sector. There’s little to worry about if you buy banking stocks at the current valuation.”
ZHIWEI ZHANG, CHIEF ECONOMIST, PINPOINT ASSET MANAGEMENT, HONG KONG
“I think the messages from the press conference are positive for China’s macro outlook. The debt swap is an important policy measure which helps local government to alleviate their debt burden. This is expected by the market, but nonetheless the confirmation of such policy is positive. Moreover the Minister of Finance said fiscal policy will be more supportive next year. This “forward guidance” is probably the most important message from the press conference.
“It is unrealistic to expect the government to announce details of the fiscal stimulus for next year at this meeting. There is a process how the fiscal budget is prepared, after the government set growth target in the central economic working conference in December. But this “forward guidance” indicates the government likely already made the decision to boost fiscal deficit next year.”
