Mixed news on China’s stimulus
Chinese stimulus
Holders of Chinese equities got mixed news on Friday. At the National Peoples’ Congress meeting, the government announced an Rmb10tn ($1.4tn) fiscal package to bail out local governments’ bad debts. The package itself, following the pattern of recent stimulus measures, is underwhelming. The Shanghai and Shenzhen CSI 300 stock index and the Rmb edged down on the news:
Bad debt is a problem for China. Chinese local governments, which are not able to issue their own bonds, have traditionally used financing vehicles similar to investment companies to borrow money; after the real estate market crash, many provinces could no longer use land sales to pay back those loans, resulting in bad “hidden” debt not on their official balance sheets. Swapping out the debt will limit financial risks and free up spending capacity, at a moment when many local governments have cut back on public services. But the size of the relief is relatively small. From Tianlei Huang at the Peterson Institute:
The impact of this package on the immediate economic situation will be limited. [Finance minister Lan Fo’an] estimates that local governments will save about Rmb600B [$83bn] in interest payments over five years. [Rmb120B, or $17bn] each year is just too small to make a difference . . . the actual spending [by the local governments] so far this year is almost Rmb3tn [$417bn] lower than the amount that was budgeted [for] this year.
Rmb10tn is probably not enough to make a lasting dent in the hidden debt problem. While Lan said there is around Rmb14.3tn ($2tn) in hidden debt on provinces’ balance sheets, the IMF put the number at Rmb60tn in a report last year. On top of that, the Rmb10tn number is not all new commitments. While Rmb6tn of new debt will be issued for the debt swap facility, Rmb4tn is debt that was already available to local governments for related purposes.
Without more muscular stimulus, chances that the economy will hit the government’s 5 per cent growth target this year remain low. But more may be forthcoming. The MOF meeting in October laid out four goals of the stimulus, of which resolving local hidden debt was the first (followed by boosting bank lending, stabilising the real estate market, and supporting consumers). While we are not sure they will continue to be rolled out in the announced order, statements made by Lan imply the government will deliver on the other three goals.
Markets have been impatient for details on the stimulus. The timing of this package, right after the US election, suggests that the Chinese government was waiting to learn who would win the White House before making strong financial commitments. And the scale of this package raises the possibility that the government is saving its fiscal firepower in order to respond to the Trump administration’s eventual China policies. A more concrete and substantial fiscal package may emerge soon.