Expectations are growing that China’s government will boost spending on infrastructure as part of a broader stimulus push following the central bank’s interest rate cuts.
(Bloomberg) — Expectations are growing that China’s government will boost spending on infrastructure as part of a broader stimulus push following the central bank’s interest rate cuts.
Authorities may increase the quota for local government special-purpose bonds to finance infrastructure investment, according to Nomura Holdings Inc., Standard Chartered Plc and Morgan Stanley. It’s possible the central government could issue special-purpose bonds, as it did in 2020, or use state policy banks to boost spending, other economists said.
China’s fiscal support for the economy has been weak this year, with total government spending in the first five months increasing by less than 1% compared with the same period last year, data released Friday by the ministry of finance showed. That has contributed to a slowdown in China’s economic recovery this year.
China’s State Council, which co-ordinates government ministries, said on Friday that the country needs “more forceful” policies to support the economy. The government is studying new measures that will be adopted in a “timely manner,” state media reported, without giving a timeline or details.
“It will be important for fiscal policy to play a bigger role. If the government sector can increase its spending, both for consumers and infrastructure that would be great,” said Wang Tao, chief China economist at UBS Group AG. Although Beijing is unlikely to provide direct subsidies to households, “probably more funding support for infrastructure investment is in the pipeline,” she added.
Chinese authorities are shifting to a more supportive policy stance after recent data showed the economy slowing following an initial post-reopening surge. JPMorgan Chase & Co., UBS Group AG and Standard Chartered Plc all trimmed their 2023 gross domestic product growth forecasts to 5.5% or lower this week, after official figures for retail sales growth and fixed asset investment slowed from April and undershot expectations.
The central bank cut interest rates this week for the first time in 10 months, with economists predicting more easing in the rest of the year. Economists argue that the effectiveness of monetary policy is limited by weak private sector confidence, with companies and households both reluctant to borrow.
The State Council is considering a broad package of support measures for areas including the property sector, where investment is still contracting, Bloomberg News reported earlier this week. Officials at China’s commerce and economic planning ministries also hinted at possible incentives to boost consumption, including on cars and household appliances.
Senior officials have held several meetings with business leaders and economists recently to seek advice on how to revitalize the economy, according to people familiar with the discussions. Officials are seeking to balance their desire to boost confidence with concerns about high debt levels in the economy increasing financial risk.
“China has plenty of room to boost stimulus if it so chooses,” Michael Hirson, China economist at 22V Research LLC and a former US Treasury attache in Beijing, said in a note Thursday. “The key obstacles are concern over financial risks and the reluctance so far to leverage the central government’s balance sheet to expand fiscal stimulus.”
The ongoing property sector downturn has limited government outlays on infrastructure because they are partly funded by land sales to developers. Government revenue from selling land-use rights fell 20% year-on-year in the first five months of the year, the finance ministry said. Local governments are also using more of their revenue for servicing debt, limiting resources available for other spending.
Local governments have been slow to use their annual quota for special-purpose bonds for infrastructure spending so far this year. A total of 2.1 trillion yuan ($294 billion) worth of such bonds have been issued so far this year, below the 3.3 trillion yuan sold in the first six months of 2022, according to data compiled by Bloomberg.
Nomura expects Beijing to add an extra 500 billion yuan issuance quota for local government special bonds, which would bring the total quota this year to 3.85 trillion yuan. A total of 4 trillion yuan worth of new special bonds were issued last year, according to data compiled by Bloomberg.
Morgan Stanley predicts the local special bond quota could be increased by as much as 1.1 trillion yuan, partly by using the unused quota from previous years.
The central government could also sell its own special sovereign bonds, according to Nomura, a tool it only uses on an ad-hoc basis, like in 2020, when it issued 1 trillion yuan of the bonds to pay for measures to fight the pandemic.
Another likely option to boost infrastructure investment is via state policy banks, like China Development Bank, economists said. Last year, the lenders provided 740 billion yuan funding for projects, which drove even more investment and financing for infrastructure.
Government agencies are hinting at more targeted support as well.
China will roll out measures to promote the growth of industries including automobiles, home appliances and catering, commerce ministry spokeswoman Shu Jueting said Thursday. Policies to boost consumption — including encouraging more car purchases and building more electric vehicle charging stations — are also being worked on, National Development and Reform Commission spokeswoman Meng Wei said Friday.
The government has largely stuck to its tradition of keeping the deficit target on its general budget within 3% to ensure fiscal health, only breaching that level in 2020 and 2021. It has been more flexible with its budget for capital spending.
“The government seems very reluctant to spend more on-budget money as a way to lift growth,” said Tianlei Huang, China program coordinator at the Peterson Institute for International Economics. “There are resources available for the government, both central and local, to draw on and increase spending if they really care about restoring growth.”
–With assistance from Jing Li and David Ingles.
(Updates with State Council comments in fourth paragraph)
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