The Ministry of Finance remained vague on its stimulus plans
The local government debt swap may be bigger than expected
But support for consumption and real estate may fall short
At this point, waiting for fiscal stimulus from China feels a bit like Charlie Brown trying to kick Lucy’s football. Twice in one week, the government teed up new support measures to announce at high-profile press conferences, only to pull the ball away at the last second. The National Development and Reform Commission (NDRC) didn’t deliver anything significant on Tuesday, and the Ministry of Finance (MoF) followed up on Saturday with little more than vague promises.
Still, I don’t think the government is playing a cruel joke. Rather, as in most countries, the fiscal bureaucracy moves more slowly than monetary policy can respond. A spending package is likely to be announced in the next few weeks. Probably after the Standing Committee of the National People’s Congress approves an increase to the government’s debt limits, which could happen later this month.
More helpfully, the MoF press conference provided some more clues about what’s likely to be in the fiscal package.
First, the local government debt swap is likely to be significantly larger than the ¥1tn that Reuters previously reported was under consideration. Governor Lan Fo’An said, “we plan to increase the debt limit on a one-time basis by a relatively large scale to replace local governments' existing hidden debts.” Since ¥1.2tn has already been arranged to refinance their off-balance sheet debts this year, Lan’s statement suggests the upcoming re-finance operation might be several multiples of that. Perhaps ¥5tn or more over the course of next year.
This might allow the government to claim a large headline figure for the scale of its fiscal stimulus, one that would greatly exceed investor expectations. But this wouldn’t inject new money into the economy, and so would do little to resolve the economy’s problems. Swapping one kind of local government debt obligation with another won’t absorb any of more of the excessive household financial surplus that has weighed on bond yields, prices, and real GDP growth. That would require a large net increase in the total debt stock.
Second, the plans to stimulate consumer demand now seem likely to fall short of expectations. Lan was extremely vague when discussing the government’s plans to support households. Vice Minister Guo Tingting talked about helping college students by providing more scholarships and grants, but there was no mention of any direct transfers to households or other major initiatives.
Third, Lan confirmed that special purpose bonds will be used to recapitalise the largest banks, even though he struggled to explain why. These are the best capitalised banks in China. And, as the PBoC’s bank survey shows, overall loan growth has been held back by weak demand, not tighter lending conditions (Chart 1). We continue to believe the recapitalisation will have little macro impact. Although it would help the banks absorb the income loss that will come from restructuring a larger share of their loans to local government financing vehicles.
Finally, Lan introduced a new measure to support the property market. Local governments will now be allowed to use their special-purpose bonds (roughly equivalent to project bonds in other countries) to buy unsold flats from developers and convert them into low-income housing units. This is part of a broader policy push to curtail new construction for affordable housing and instead use the existing housing stock, or that already under construction, for this purpose.
We anticipated this policy change but remain sceptical that it will work. Even if the quota for local government special bonds is raised to support this initiative, many will likely remain cautious.
That’s because the scheme requires a bit of Ponzi financing to work. Since nearly 90% of low-income urban households own at least one home (Chart 2), moving them into new flats will also require buying their existing house in most instances. That would leave the government with a new plot of land that needs to be developed and sold on. And since developers’ unsold inventories are concentrated in smaller cities where the population is already shrinking, there’s a high possibility that local officials would end up holding the bag.
The bottom line: The scale of China’s forthcoming fiscal stimulus now seems likely to exceed expectations. But the composition is likely to be heavily skewed toward local government debt restructuring. This looks more like a plan to minimise the financial risks from the transition to a new growth model than an attempt to end China’s secular stagnation.
Comments