China will set a lower growth target in 2020, according to policy sources who spoke to Reuters for a weekend piece.
“We aim to keep next year’s growth within a reasonable range, or around 6%”, one unnamed source said. That’s lower than this year’s 6-6.5% range. Beijing will reportedly lean on infrastructure spending to bolster activity.
That sounds like a mundane story, but it’s not. Growth was the most sluggish in decades this year, as the trade war undercut the economy at a delicate juncture.
For years, China has attempted to walk a kind a tight rope, balancing a deleveraging push aimed at de-risking a tangled shadow banking complex, with ensuring that productive credit to the real economy keeps flowing. At the same time, the country is marking a difficult transition from a smokestack economy to a more sustainable, consumption-driven model.
Throw in the economic liberalization push and attendant pretensions to allowing market forces to play a larger role in determining winners and losers, and you’re left with a Herculean challenge.
The new growth target will be officially unveiled in March, at the annual parliamentary session, but it was approved by the Party leadership this month at the Central Economic Work Conference, sources said.
This is broadly consistent with the market’s takeaway from the conference. “The statement emphasized the ‘six stabilities’ [which] to us… signals that the growth target is still highly important and we still believe the ‘around 6%’ is the most likely target”, Goldman said last week, noting that “infrastructure investment is mentioned in the statement, suggesting infrastructure spending will be used to support the economy were growth to slow notably below 6%”. Some see the pace of growth decelerating to a 5-handle as soon as Q4 of this year.
Beijing will apparently leave the door open for more local government special bond issuance in order to boost infrastructure spending.
Earlier this month, news that Hohhot Economic & Technological Development Zone Investment Development Group, a local government financing vehicle, missed a deadline for early repayment spooked the market. Ultimately, the LGFV repaid some 565 million yuan of principal and 68 million yuan in interest, and secured an extension to repay the remainder of the 1 billion yuan privately-issued note, but the episode was yet another warning sign.
“The latest drama offers a fresh signal that Chinese policymakers remain wary of allowing its heavily indebted regional funding vehicles to fail and destabilize a stressed financial system”, Bloomberg wrote, adding that “Beijing relies on these local government entities, which have been responsible for China’s infrastructure boom in the past decade, to cope with a sharp economic slowdown and unabated trade tensions”.
In other words, the model that finds local governments (on-balance sheet, or off-balance sheet) acting as a countercyclical buffer to ensure growth doesn’t fall below 6% is itself stressed. LGFVs have sold more than 8 trillion yuan of RMB-denominated bonds. Bloomberg data suggests around 1.3 trillion will mature in 2020.
Another potential problem appears to be those vehicles’ role as credit guarantors for private borrowers. According to Guosheng Securities, some 2,000 of these funding vehicles have extended nearly 6 trillion yuan in guarantees to domestic firms. That’s 25% of their net assets and nearly three-quarters of their own RMB-denominated bonds.
That business – guaranteeing loans and bonds from the private sector – is apparently booming thanks in part to rising defaults, which make it more difficult for the private sector to secure funding from banks, which would rather lend to SOEs for obvious reasons.
According to media reports, most of the LGFV guarantees are to other LGFVs, but that’s hardly comforting. It suggests a mind-boggling array of embedded cross-holdings that would likely be all but impossible to disentangle should the vehicles run into trouble.
There’s more than a little nuance to be had when it comes to putting all of this in the context of 2020 and China’s efforts to ensure annual growth remains “around” 6%.
Sources told Reuters that “local governments could be allowed to issue special bonds worth some 3 trillion yuan in 2020 to fund infrastructure projects, including 1 trillion yuan front-loaded to this year”. The LGFVs are generally used to raise off-balance-sheet funding when issuance quotas on local-government bonds prove insufficient to shore up aggregate growth via infrastructure projects.
Much like China’s labyrinthine shadow banking complex, this is a laughably (and notoriously) convoluted setup. And one way or another, it’s likely to be at the heart of China’s efforts to keep growth stable in 2020 amid gale force external headwinds and lackluster domestic demand.
Analysts last week suggested that more tax cuts in 2020 are probably a non-starter given fiscal deficit concerns. Reuters’ sources said the deficit could rise above this year’s targeted 2.8%, but won’t likely exceed 3%. Those people confirmed that room for more tax cuts is limited.
