Domestic Bonds

China plans more fiscal stimulus as economic outlook darkens

(Aug 18): Chinese state media said local governments could sell more than US$229 billion in bonds to fund infrastructure investment and fill budget gaps, a new move by Beijing to shore up a economy hit by worsening coronavirus outbreaks and a real estate crisis.

Reports accompanied a string of bad economic news this week: Covid cases hit a three-month high, suggesting more lockdowns are likely; real-time data indicates that home sales continued to fall this month; Monday’s weak economic data signaled a drop in domestic spending; and heat waves caused power shortages in several provinces, forcing some plant closures.

Economists are turning even more bearish, with Goldman Sachs Group Inc lowering its gross domestic product growth projection to 3% from 3.3% while Nomura Holdings Inc cut its forecast to 2.8% from 3.3%. That’s below the consensus of 3.8% in a Bloomberg survey of economists and far from the government’s initial target of around 5.5% set for the year.

China‘s growth in the second half is expected to be “significantly hampered” by the Covid Zero policy, as well as “the deterioration of the real estate sector, the deterioration of local government fiscal conditions and a likely slowdown in export growth”, the Nomura economists led by Lu Ting wrote in a note.

The monetary stimulus took the form of a surprise cut in interest rates at the start of the week. But the relatively small size of the cut prompted economists to call for more easing, including more rate cuts and reductions in banks’ reserve requirement ratios.

The fiscal stimulus has centered on boosting investment in infrastructure and giving local governments more resources to do so.

The China Securities Journal reported on its front page on Thursday that local governments may use some of the 1.55 trillion yuan ($229 billion) in unused bond quotas from previous years. This could be supplemented in advance with an unspecified amount of next year’s quota, the Shanghai Securities News reported, according to Luo Zhiheng, chief economist at Yuekai Securities Co.

The third quarter will be an “important window” for sales of additional local government special bonds that are mainly used to finance infrastructure spending, Shanghai Securities News quoted Zhang Yiqun, a member of the Public Finance Corporation of China. Local governments have already issued a record amount of these bonds for the first half of this year, using most of their 2022 quota.

While Beijing has yet to announce a comprehensive plan to restore confidence in the housing market, economists doubt an infrastructure-focused approach will work on its own. Real-time data, including from satellite images, shows that the boost to construction from infrastructure is so far offset by deteriorating real estate investment.

President Xi Jinping and Premier Li Keqiang both made public appearances this week in a sign that the Communist Party’s annual secret summer break at a northern Chinese resort town is over. Talks there have likely been dominated by personnel changes at the next party congress, which takes place every five years, another reason analysts doubt there is a bigger stimulus coming.

“The rollout of a comprehensive stimulus package is unlikely in a year of government reshuffle,” Nomura economists wrote.

Wednesday’s data showed a further drop in tax revenues as the economy slows and the government grants major tax breaks to support businesses. At the same time, local governments have been pressured to spend more, especially on virus testing and checks as Beijing orders local governments to persist with a Covid Zero policy.

China’s increased budget deficit – including current spending, plus funds used for investment – has reached 5.24 trillion yuan so far this year, according to Bloomberg calculations based on official data.

Fiscal data highlighted the continued slump in China’s property market, which is driving demand for goods and services worth about 20% of China’s GDP. Local government revenue from land sales in the seven months fell nearly 32% in July from a year earlier, although the magnitude of the fall was about the same as in June, according to official data. Revenue from deed taxes, which are paid when a property is bought or sold, fell 28.3% in July.