China Says It Has a Big Stimulus Coming—But Still Won’t Say How Big
With few details offered by officials, stock investors are back to where they started the week: in a waiting game
HONG KONG—After a week of hope and disappointment on China’s stock market, anticipation was high among investors on Saturday that senior officials in Beijing would unveil a fiscal stimulus package with a large headline dollar figure.
They did not.
Instead, Finance Minister Lan Fo’an said that officials had a “fairly large” amount of room to boost spending, while pledging the boldest measures in years to resolve local governments’ debt loads, support the nation’s ailing property market and recapitalize large banks—tackling some of the most intractable challenges in the Chinese economy.
“I can tell you responsibly that China’s finances are sufficiently resilient, and that by adopting comprehensive measures, we can achieve a balance between revenues and expenditures and accomplish the annual budget target,” Lan said. “Please be assured.”
Markets were closed on Saturday, so it remains to be seen whether Lan’s pledge, free of any specific dollar figures, will be enough to assuage worries that Beijing has moved too slowly to address a sharp slowdown in the world’s second-largest economy.
Earlier in the week, stocks had surged as expectations for a flood of stimulus ran high, only to come tumbling down after a Tuesday news conference by China’s main economic planning agency ended without any details on the scale and scope of any government measures.
Those hopes were revived again after China’s Finance Ministry announced plans for Saturday’s news briefing, although mainland China and Hong Kong’s respective benchmark stock indexes both finished the week deep in negative territory.
With the Finance Ministry now having outlined its plans, albeit without a headline figure, stock investors are back to where they started the week—in a waiting game for more details from Beijing. Economists and market strategists now say any specific numbers are only likely to be announced later this month, after the standing committee of China’s legislature, which is entrusted with approving changes to the budget, can meet and approve any stimulus plans.
Despite shying away from any specific fiscal stimulus figures, the Finance Ministry addressed a range of challenges that they are focusing on, specifically the growing debt burden at the Chinese local government level, concerns about banks’ capital levels and the mess in the country’s property market.
The Finance Ministry said it would conduct a one-off quota increase for local governments, many of which have spent lavishly on infrastructure projects using off-the-books financing vehicles, to swap out their “hidden debt” for explicit government-backed debt. Without disclosing the size of the quota, Lan touted the plans as “the boldest measure” in recent years to address the local-government-debt overhang, which has become one of the biggest worries among China economists.
Many governments at the subnational level have fallen into dire financial straits as land sales to property developers—a key pillar of local government coffers—collapsed amid Beijing’s attempts to rein in the real-estate sector. That drop in land-sale revenues coincided with the Covid-19 pandemic, which hit the governments’ tax intake.
No one knows exactly how much Chinese local governments have accumulated in off-the-books debt, but economists estimate the size to be somewhere between $7 trillion and $11 trillion, about twice the size of China’s central government debt. As much as $800 billion of it is at a high risk of default, some economists have estimated.
Lan said Saturday that local governments will be allowed to use the proceeds from special-purpose bonds—debt typically used to fund state-led infrastructure projects—to buy up unsold homes from developers and convert them to affordable housing, and to repurchase idle land parcels from developers. Both measures have been floated by economists as ways to help relieve liquidity pressure on the country’s distressed real-estate developers.
Separately, Liao Min, a vice finance minister, said during Saturday’s briefing that the government will sell special treasury bonds to recapitalize China’s largest commercial banks. Notably, Liao didn’t put a number on the size of the bond issue—a figure that investors were closely watching for.
Before the press conference, economists and strategists had offered predictions about the dollar amount on any notional stimulus package, with estimates ranging from one trillion yuan and three trillion yuan, equivalent to $142 billion to $425 billion. Some tallied up all the key areas where China’s economy needed fiscal boosts and the figure came to about 10 trillion yuan, or $1.42 trillion, equivalent to roughly 8% of China’s gross domestic product last year.
While some, like Ting Lu, chief China economist at Nomura, had predicted earlier that the stimulus package might be capped at 3% of GDP a year for a few years, Lan’s comments on Saturday imply that Beijing will likely raise the fiscal deficit above that level next year, said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management.
Lisheng Wang and his colleagues at Goldman Sachs, writing to clients after Saturday’s news briefing, expressed some disappointment at the continued lack of specifics on the size of the stimulus.
Still, over the past few weeks, “it’s clear that policymakers have been making more forceful and coordinated easing efforts to boost domestic demand (especially consumption), normalize inflation and rebuild confidence,” he wrote. “Fiscal stimulus is likely to take the heavy lifting.”