Six trillion yuan. That’s the number. Or maybe it’s seven trillion. Or eight trillion. Don’t get confused!
Investors and macro watchers spent the last week obsessing over Beijing’s refusal to commit to a headline figure for long-bond issuance and/or deficit-spending. The context, obviously, is the Party’s maddeningly belabored stimulus rollout which began on September 24 when PBoC governor Pan Gongsheng announced a series of rate cuts.
Pan’s press conference should’ve served as a blueprint for the National Development and Reform Commission and the Ministry of Finance. The PBoC offered specifics and promptly followed up with action. By contrast, the NDRC and the MoF offered platitudes and vague pledges of “large” support.
To say markets are anxious about this would be a good candidate for macro understatement of the year. CPI data released over the weekend underscored the urgency of the situation in China, as did lackluster trade data out Monday. Credit figures covering September, also released on Monday, showed that although total financing topped estimates, new yuan loans undershot at CNY1.6 trillion versus CNY1.8 trillion expected. Note the growth rate of the country’s loan stock was just 8% last month, yet another record low.
Monday’s credit data wouldn’t reflect any impact from Pan’s rate cuts, but because he’s pushing on a string, I doubt you can expect credit growth to pick up in the absence of fiscal follow through.
With that in mind, Caixin reported Beijing “may” (here we go again already with the ambiguity) issue CNY6 trillion in long-term bonds over the next three years. “The funds will be partly used to help local governments resolve their off-the-books debts,” the linked report said, citing “sources.”
This’ll be repetitive for some readers, but that figure — the CNY6 trillion — needs context, so I’ll briefly recapitulate. Analysts were looking for a headline commitment of anywhere between CNY2 trillion and CNY3 trillion from the MoF during the underwhelming October 12 briefing mentioned above. Jia Kang, a Chinese economist who once ran an internal MoF think tank, recently suggested China could issue as much as CNY10 trillion going forward with the proceeds earmarked for some kind of stimulus. That’s the context for the Caixin sources report.
CNY6 trillion, spread over three years, is CNY2 trillion per year. On its own, CNY2 trillion probably wouldn’t count as impressive, but the implied forward commitment (i.e., a sustained CNY2 trillion fiscal impulse funded by super-long issuance) might be enough to sustain sentiment.
Not to rain on the parade, but I’m still unconvinced that the Party’s channeling the funding to the right places. Chinese consumers really need direct stimulus. Yes, local governments are overleveraged, and could certainly use a helping hand cleaning up shadow debt, but is that really going to facilitate consumer spending? It’ll unburden localities, but if households don’t want to borrow and spend, it won’t make any difference.
If you’re confused about how all of this fits together — where all of these figures overlap, and so on — don’t worry. So’s everybody else. As I alluded to over the weekend, anyone who says they have a “clean” read on the situation is either lying or deluding themselves. Analysts are resorting to what I’ve described as “speculative math exercises” which cobble together estimates of hypothetical “head room” and count “freed-up” liquidity as money spent.
Pseudo-famous China strategist Hao Hong weighed in on the Caixin report. “This is the biggest effort yet from the central government,” he said, on the way to suggesting China could well front-load the issuance. “There is much misunderstanding regarding these numbers,” Hao went on. “At the weekend presser, the MoF said there would be CNY2 trillion of relief for local governments this year and CNY1 trillion for recapping the big banks.” Those figures, he insisted, “are [in] addition to today’s news” and investors shouldn’t “get confused.”
Sorry, Hao, but to the extent confusion’s rampant (and it is), the Party has itself, and only itself, to blame.
We’ve discussed whether Xi agrees that the consumer needs immediate stimulus and structural reform.
WSJ article:
*”But Xi didn’t give his economic mandarins a blank check. According to officials and government advisers close to decision-making, he wanted to bail out indebted Chinese municipalities on the brink of collapse and revive the stock market, without veering too far from his focus on letting the state drive China’s transformation into an industrial and technological powerhouse.
For Xi, the officials and advisers say, the near-term goal isn’t to massively stimulate demand but to fend off a brewing financial crisis—or “derisking,” in official lingo, thereby helping to stabilize the overall economy and achieve the 5%-or-so growth target for this year.”*
So, there will be no drive toward a consumer-led economy in China. Xi’s vision is fingers in the debt dike then more of the same.
So, the question we discussed a while ago seems to be partly answered. Xi is focused on debt, not on the consumer.
China’s LG and LGFV debt must be at least CNY 100TR by now. “If one were to include LGFV bank borrowing and shadow credit, total local government debt likely would be in the 90 to 110 trillion RMB range, or between 75 and 91% of China’s GDP in 2022. Across China’s provinces, 12 of them now have local government debt over 50% of provincial GDP as measured by bonds outstanding. In just 2017, only three provinces had such high levels of debt. Only two provincial units, Shanghai and Guangdong, had local debt below 25% of GDP by the end of 2022. Because this debt requires constant servicing in the form of interest payments and repayment of principal, debt servicing likely has placed increasingly difficult constraints on the local and even the central budget. By the end of 2022, monthly debt servicing has surpassed 100% of monthly fiscal income for 12 of China’s 31 provincial units. Repayment demand has further accelerated in 2023.”
https://china.ucsd.edu/_files/2023-report_shih_local-government-debt-dynamics-in-china.pdf
Xi made the situation much worse by cratering the property market (as land sales to developers was a major part of LG income) and piling more unfunded mandates on LGs (including huge Covid lock-down expenses). Indeed, the LG debt crisis is largely a creation of the central government.
The debt servicing burden is extreme, exceeding provincial income in some periods. LGs are cutting services, not paying wages, and still issuing new debt to pay interest on existing debt.
Central government issuance of CNY 6TR over 3 years will do little to resolve this debt problem. Might kick the can forward a year. ” Local debt can only be sustainable when the central government takes on more expenditure tasks or transfers more funding downwards, or when local governments find a way to increase income.” Nothing along these lines has been discussed by Xi’s men.
https://www.cambridge.org/core/journals/china-quarterly/article/political-economy-of-chinas-local-debt/7E49310CA4D931BCE77DE1499C8388FE
The links above are well worth reading, but for the TL:DR version:
https://www.atlanticcouncil.org/blogs/econographics/sinographs/chinas-local-government-debts-are-coming-due/
Add on corporate and household debt, which has also soared.
I think we are slowly getting an answer to another question we discussed – is the central govt able to solve the debt problem?
China’s long, slow stimulus reveal: the gift that doesn’t stop giving, but yet is never enough.
Latest is 4 TR RMB bond issuance to complete the 48 million sold but unbuilt homes. https://www.bloomberg.com/news/articles/2024-10-17/china-to-expand-support-for-unfinished-projects-to-562-billion? Bloomberg says this is “part of a top-down plan to ensure unfinished homes are delivered to buyers, and prevent another widespread mortgage boycott”.
More effort to stabilize the debt situation – here, household debt.
No details on more bonds to buy unsold homes. And those 48 million more homes, when completed, will go into the existing home supply.