China is set to issue an additional 1 trillion yuan ($137 billion) in sovereign bonds to stimulate economic growth, as announced on the last day of the Standing Committee of the National People’s Congress (NPC) meeting.
The approved plan will increase its budget deficit ratio to 3.8 percent of gross domestic product (GDP) in 2023, above its self-imposed limit of three percent. This means more government debt could be issued to help revive the economy.
According to state news agency Xinhua, the new sovereign bond proceeds will be used to rebuild disaster-stricken areas and upgrade urban drainage prevention infrastructure to make China more resilient to natural disasters.
Additionally, authorities passed a bill allowing local governments to frontload part of their 2024 bond quotas at the meeting. The government has yet to announce the size of the frontloaded bonds.
China had previously let local governments issue bonds ahead of this annual session of parliament, which approves government budget plans. Local governments were instructed to issue all 3.8 trillion yuan of special local bonds for 2023 by September to fund infrastructure projects.
Beijing rarely adjusts its budget mid-year, only doing so in times of crisis. The last time was in the 2008 crash and the 1990s Asian financial crisis.
“It is rare for the central government’s fiscal plans to be revised outside the usual budget cycle, so this move signals clear concern about near-term growth,” said Mark Williams, chief Asia economist at Capital Economics.
Policy shift
The issuance of sovereign bonds suggests a shift in policy, distributing the debt burdens to the central government instead of local authorities. Local government debt has been a major concern, especially as their finances rely heavily on the country’s collapsing real estate sector.
According to Reuters, the central government’s debt-to-GDP ratio is 21 percent. In comparison, local governments have a much higher ratio of 76 percent.
Last month, the central government launched a program to allow struggling regional governments to exchange high-interest, off-balance-sheet borrowing for lower-interest bonds.
Citigroup economists argued that exceeding the government’s usual debt-to-GDP target would signal policymakers’ increased urgency to achieve the growth goal.
In a report to the Standing Committee, People’s Bank of China Governor Pan Gongsheng pledged to strengthen and focus policy. He said that policy would be adjusted to respond to both short-term and long-term economic conditions.
China’s current economic condition
Despite China’s strong third-quarter economic growth that improves its chance of hitting the five percent growth target for 2023, economists predict that growth will slow to 4.5 percent in 2024.
The property sector continues to weigh on the Chinese economy. A collapsing property market, weak consumer spending and low productivity have dampened economic growth expectations this year. Capital flight from Chinese markets has also been significant.
This budget revision and President Xi Jinping’s recent visit to the central bank signal the top leadership’s growing concern about the economy.
However, a former senior official said the current mix of macroeconomic policies, monetary adjustments and expansionary fiscal measures will not be enough to revive China’s growth prospects.
“The biggest risks are to economic growth sustainability,” said Yang Weimin, who participated in drafting China’s important reform documents.
He also said that risks in finance and the property sector would precipitate without meaningful growth through reforms.
According to Yang, reforms could drive around five percent annualized growth over the next 12 years. This would help Beijing achieve its goal of bringing per capita GDP to the level of a moderately developed country by 2035.