China’s Vice Finance Minister, Zhu Zhongming, expressed optimism on Wednesday regarding the profound impact of the nation’s freshly introduced sovereign bonds on propelling its economic recovery. This move aligns with the government’s aggressive fiscal stimulus strategy, which has substantially augmented its budget deficit.
In a significant development, China’s top parliamentary body recently greenlit a remarkable issuance of 1 trillion yuan ($137 billion) in sovereign bonds. These funds are earmarked to facilitate the reconstruction of regions ravaged by this year’s catastrophic floods and enhance urban infrastructure to fortify resilience against future calamities, as reported by state media earlier this week.
During a press conference, Zhu highlighted the economic benefits of these treasury bonds, emphasizing their pivotal role in stimulating domestic demand and further consolidating the nation’s ongoing economic resurgence.
China’s economy, the world’s second-largest, displayed a notably robust performance in the third quarter, surpassing expectations. This upbeat growth trajectory enhances Beijing’s prospects of achieving its growth target of approximately 5 percent for the year 2023. However, economists remain concerned about the ailing property sector, which continues to cast a shadow on the broader growth outlook.
In an unusual maneuver, China significantly increased its 2023 budget deficit to approximately 3.8 percent of its gross domestic product, up from the initially set 3 percent. This expansion is primarily attributed to the upsurge in central government debt, as reported by state media sources.
The proposed surge in bond issuance comes in tandem with Beijing’s preparations to administer a fresh round of fiscal stimulus, designed to underpin the ongoing economic revival. Nonetheless, there are concerns that a return to debt-driven stimulus measures might undermine the government’s pursuit of a consumption-driven economic growth model.
While some analysts downplay the immediate economic benefits of this massive debt issuance, cautioning against overestimating its impact, others foresee more restrained fiscal multiplier effects. Notably, spending on water conservancy projects is expected to yield limited immediate economic returns.
Zhu revealed that China will adopt a judicious approach to bond issuance, carefully aligning it with spending needs. Stringent measures will be implemented to prevent the misuse of bond funds. The finance minister underscored that the government’s debt levels remain within reasonable limits, although specific figures were not disclosed.
Policy advisors contend that the central government possesses substantial fiscal leeway, given that its debt-to-GDP ratio stands at a modest 21 percent, significantly lower than the 76 percent ratio observed for local governments.
The funds raised through this bond issuance will be allocated over a two-year period, with half of the amount earmarked for the current year and the remainder to be deployed in the following year, as per state media reports.
Analysts at UBS anticipate the government to further increase its budget deficit and special local bond quotas for 2024. They also expect additional reductions in interest rates and bank reserve requirement ratios to stimulate economic growth.
China’s parliament has additionally passed legislation permitting local governments to advance a portion of their 2024 local bond quotas, a move designed to expedite funding for vital infrastructure projects.
Local governments, as per previous directives, were instructed to complete the issuance of the 2023 quota of 3.8 trillion yuan in special local bonds by September, with a focus on financing infrastructure projects.