Construction of the 597-meter-tall Goldin Finance 117 Tower in Tianjin, China, began construction in September 2008, but it remains unfinished in this photo taken on August 28, 2024.
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BEIJING—China’s Finance Ministry’s weekend press conference highlighted how the ministry is focused on tackling local government debt problems, rather than the stimulus packages that markets have been waiting for.
In his opening remarks on Saturday, Finance Minister Lan Foan laid out four measures, starting with increased support for local governments to resolve debt risks. It was after Lunn outlined these four points that he teased that the country was on the verge of increasing its debt and deficit.
“The press conference is consistent with our view that addressing local government funding issues is a priority,” Robin Xin, Morgan Stanley’s chief China economist, and his team said in a report on Sunday. ” he said. They also expect the central government to play a bigger role in debt restructuring and stabilizing the housing market.
“However, we believe that increases in consumer support and social welfare spending are likely to remain modest,” Morgan Stanley analysts said.
The downturn in China’s real estate market is squeezing a key source of revenue for local governments, many of which are already in financial trouble even before spending money to fight the coronavirus. Meanwhile, weak consumption and slowing overall growth are fueling calls for further fiscal stimulus.
Chinese economic think tank CF40 said in a report on Saturday that the four policies announced by the Ministry of Finance focus on tackling structural problems.
The report cited expectations for increased government intervention, stating that it was “not specifically aimed at addressing macroeconomic problems such as insufficient aggregate demand or a decline in the price level through Keynesian fiscal expansion.” .
CF40 estimates that China will not need additional fiscal resources to achieve its full-year growth target of around 5%, as long as the spending it has already announced is implemented by the end of the year.
Local governments are a drag on domestic demand
Finance Minister Lan said on Saturday that the central government would allow local governments to access 400 billion yuan ($56.54 billion) in bonds to help pay for salaries and basic services.
He added that a major plan to address hidden municipal debt would be announced in the near future, but did not give a timeline. Lan claimed that the hidden debt level at the end of 2023 will be half of what it was in 2018.
Historically, local governments paid more than 85% of spending, but as of 2021 they only received about 60% of tax revenue, according to Rhodium Group.
In its Aug. 30 report on China, the International Monetary Fund said local government fiscal constraints were “contributing to downward pressure on prices.”
The core consumer price index, which excludes volatile food and energy prices, rose 0.1% year-on-year in September. This is the slowest speed since February 2021, according to the Wind Information database.
For Morgan Stanley, resolving local government debt issues is an “important step” in halting the downward trend in prices, almost as important as economic stimulus measures aimed at boosting demand.
waiting for another meeting
There has been a flurry of policy announcements in recent weeks, with investors keeping an eye on China’s parliamentary meeting scheduled for later this month. China’s legal process requires approval of changes to the national budget. Last year’s meeting concluded on October 24 and oversaw an unprecedented increase in the budget deficit from 3% to 3.8%, according to state media.
Analysts are divided on the specific amount of financial support, if any.
“Maybe 2 trillion? [yuan] “For us, it doesn’t really make that much of a difference between $10 trillion and $10 trillion,” Vikas Pershad, a fund manager at M&G Investments, told CNBC’s “Squawk Box Asia” on Monday. “Our bet on China is a multi-year bet.” . “Valuations for Chinese stocks are too low.”
He stressed that policy direction is “on the right path” regardless of the size of the stimulus package.
Parshad had been talking about buying opportunities in Chinese stocks since January, but said on Monday that recent high activity in the region meant he was no longer actively involved in the sector.
Chinese policymakers generally maintain a conservative stance. Unlike Hong Kong and the United States, the Chinese government did not hand out cash to consumers after the pandemic.
At least 2.5 trillion yuan of additional funding is needed to keep growth at around 5% this year and next, said Julian Evans-Pritchard, head of China economics at Capital Economics.
“If it’s less than that, the real risk is that the economy will continue to slow next year, given all the structural headwinds the economy faces,” he told CNBC’s “Squawk Box Asia” on Monday. I think so,” he said.
Evans-Pritchard said China’s other means of support have previously included real estate and credit, but they were less effective this time, making fiscal policy more important to combat the recent economic downturn. He claimed that.
“It is clear that there is a lot of discussion about addressing existing debt issues among local governments and recapitalizing banks, so it is difficult to give concrete numbers,” he said. “Even if a lot of the additional borrowing went into these areas, it wouldn’t actually stimulate current demand that much.”
—CNBC’s Sonia Heng contributed to this report.
