(Wo-chiang Lee, Professor, Department of Banking and Finance, Tamkang University)
As the 2024 has entered its fourth quarter, and it’s also the 75th anniversary of the founding of China, whether the economic growth can stay above 5% this year is crucial for the leaders. The three major financial authorities in China-Pan Gongsheng, Governor of the People's Bank of China (PBC), Li Yunze, Director of the National Financial Regulatory Administration (NFRA), and Wu Ching, Chairman of the China Securities Regulatory Commission (CSRC)-unusually held a joint press conference on September 24 to announce several major positive policies, clearly aimed at boosting the stock market, real estate market and the economy. However, after nearly a 20% rise in the A-shares, the market has entered a consolidation phase. If there is no new fiscal stimulus, it would be difficult to create another wave of boom.
In addition to launching loose monetary policies like interest rate cut and reserve requirement ratio reduction, China’s new market rescue policy was initiated by the Ministry of Finance on October 12. Finance Minister Lan Fo’an has proposed an “incremental fiscal policy” totaling 4 trillion RMB in hope of boosting the economic growth of the fourth quarter, making sure a growth rate of 5% of the entire year. Generally, the key points of the Finance Ministry’s “four arrows” policy include supporting local governments in dissolving debt risks, increasing the debt ceiling, and addressing hidden debts. Issuing special treasury bonds to support the six state-owned banks in replenishing their core tier-1 capital, thus enhancing their lending capacity. Allowing local government to use funds raised from special bonds to directly purchase land reserve, preventing real estate developers from going bankrupt and selling off at a low price, and ensuring the stability housing price. After providing subsidies to the disadvantaged before the National Day Golden Holiday, there will be additional relief and consumption-stimulating subsidies for students. Subsequently, the Minister of Housing and Urban-Rural Development Ni Hong, together with leaders from the Ministry of Finance, the Ministry of Natural Resources, the People's Bank of China, and the National Financial Regulatory Administration, held a joint press conference on October 17, announcing measures to stabilize the real estate market through “Four Cancellations, Four Deductions, and Two Increases.” Notably, the credit scale of the ‘whitelist’ projects will be expanded to 4 trillion RMB, nearly doubling the approved amount, which will inject fresh momentum to the housing market.
It is well known that China’s local debts have been in a high level for a long time, to the extent that even civil servants have faced salary cut in recent years to navigate through financial difficulties. As for the exact amount of the local debts, there are different opinions. According to the estimation of Goldman Sachs in August 2023, the amount of local government debts has accumulated to 94 trillion RMB, including debts from local government financing platforms. However, the “Report on Government Debt Management for 2023 by the State Council” indicates that the national statutory debt balance is 70.77 trillion RMB, of which 30.03 trillion RMB belongs to national debt while 40.74 trillion RMB is that of the local government, showing that the local debts exceed the central ones. According to the preliminary estimates of 2023 GDP, amounting to 126.06 trillion RMB, published by the National Bureau of Statistics, the national government’s statutory debt ratio (i.e., the proportion of government debt to GDP) is 56.1%. The report also outlines five key points, including scientifically determining the scale and structure of local government debt, deepening the reform of national debt management, strengthening and improving the management of local government bonds, advancing the whole chain and full-process supervision of local debt, and actively working with the People’s Congress for related supervision.
Further analysis suggests that the total issuance of local debt scale is expected to reach 9 trillion RMB this year, which will be used to invest in the constructions of local infrastructure, expand domestic needs, boost market confidence, and support economy. By the end of June 2024, the total local government debt balance amounted to 42.6 trillion RMB. Based on it, the amount of the entire year might exceed the total of last year. Moreover, the revenue of land transfer in the first half of this year was only 15.3 trillion RMB, dropping 55.7% compared to the same period of 2019, showing extreme financial difficulties faced by local governments. Economists estimate that the ‘hidden debt’ of local governments might be as high as 70 trillion RMB, with at least 6 trillion of this amount facing a higher risk of default.
In order to curb economic downturn and the risk of local debt defaults, it is expected to discuss raising the “fiscal deficit ratio” at the Central Economic Work Conference in December and announce it at the national “Two Sessions” in March next year (2025). According to reports, China plans to issue 6 trillion ultra-long-term national bonds in the future 3 years to address the problem of rising local debts. In addition, according to data of the National Bureau of Statistics, the fiscal deficit rates over the recent 10 years (2015-2024) have been 2.4% (2015), 3% (2016), 3% (2017), 2.6% (2018), 2.8% (2019), 3.6% (2020), 3.2% (2021), 2.8% (2022), 3.8% (2023), and 3% (2024). Due to the COVID-19 pandemic between 2020 and 2021, special bonds of over 2 trillion RMB were issued for relief efforts and tax deductions, raising the fiscal deficit rates to 3.6% and 3.2%. In 2023, an additional national bond was issued in the fourth quarter, the fiscal deficit rate was raised to 3.8% from the planned 3%, significantly higher than the 3% warning threshold. Other institutions estimate that China will maintain an active financial policy in 2025, with fiscal deficit rate likely exceeding 3% (or the adjusted 3.8%) of this year to a historic high of 4%.
Objectively speaking, the monetary and fiscal policies implemented by China have evidently created short-term stimulus. However, there are still many medium- and long-term challenges, including a prolonged downturn in the real estate market, pending debt defaults, increasing local debt, weak consumption, and outflow of foreign capital, etc. Additionally, issues like an aging population, increasing costs of social security like pensions and healthcare, transformation and upgrading of the manufacturing industry, deteriorating international economic environment, and rising geopolitical risks remain to be addressed. Whether the widely-concerned market rescue policy can work, and the economic growth target can be achieved, it will depend on whether the data of the final quarter can turn the tide.
