Huang Wentao is a director of the China Chief Economist Forum and the chief economist of China Securities Securities
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Key takeaways
1. "Debt" and "people's livelihood" are the two key words of this meeting. The content and wording of the meeting conveyed a fairly positive policy orientation, focusing on reducing the burden on local governments, supporting people's livelihood, and speeding up the elimination of rigid constraints on local governments due to debt and real estate problems.
2. This meeting marks a new stage for local government bonds. By raising the government debt ceiling, local governments are allowed to issue new bonds to replace existing hidden debts, reducing the short-term debt repayment pressure of local governments.
3. The central government can expect to increase leverage, and the coordinated efforts of fiscal and monetary resources have reached a new level.
Event:
The Information Office of the State Council held a press conference at 10 a.m. on October 12, at which Minister of Finance Lan Foan introduced the relevant situation of "increasing the counter-cyclical adjustment of fiscal policy and promoting high-quality economic development".
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"Debt" and "people's livelihood" are the two key words of this meeting. The content and wording of the meeting conveyed a very positive policy orientation, focusing on reducing the burden on the local government, supporting the people's livelihood, accelerating the removal of the hard constraints on local governments on debt and real estate issues, reflecting the policy idea of "cleaning the house and then inviting guests", opening up space for subsequent expansionary policy deployment.
This meeting marks a new stage for local government bonds. The meeting proposed that it is planned to increase the debt limit of a larger scale at one time to replace the stock of implicit debts of local governments, and increase efforts to support local governments to resolve debt risks. By raising the government debt ceiling and allowing local governments to issue new bonds to replace existing hidden debts, local governments can reduce short-term debt repayment pressure, extend debt repayment periods, realize the transformation of debt from "hidden" to "visible", integrate debt into the formal regulatory system, reduce dependence on high-risk financing, improve the standardization of debt management, and free up more resources for local governments to support the economy. Historically, the largest scale of local debt swaps was between 2015 and 2018, when the existing debt in the form of non-local government bonds was replaced by the issuance of replacement bonds, with a cumulative issuance scale of more than 12 trillion yuan. Since then, the second and third rounds of debt have been carried out in 2019 and 2020-2022 respectively, and the hidden debts have been resolved through the issuance of replacement bonds and special refinancing bonds. So far in 2023, the Ministry of Finance has arranged a local government debt limit of more than 3.4 trillion yuan to support the resolution of existing hidden debts and the digestion of government arrears to enterprises. Regarding the current round of debt swaps, the Ministry of Finance stressed that this policy is the most supportive measure introduced in recent years, which will greatly reduce the debt pressure of local governments, free up more resources for local governments to support economic development and consolidate the "three guarantees" (i.e., ensuring basic people's livelihood, ensuring wages, and ensuring operation) at the grassroots level. Therefore, it is expected that the scale of this debt swap may exceed the scale of 2015-2018, which is expected to greatly alleviate the contraction tendency of some local governments caused by debt problems in the past few years.
The central government can expect to increase its leverage, and the coordinated efforts of fiscal and monetary governments have reached a new level. The meeting stressed on many occasions that the central government still has a relatively large room for borrowing and raising the deficit. The debt level of the central government on the mainland is at the lower level of the middle reaches in the world, and the fiscal situation is generally sound. In 2023, the central government debt-to-GDP ratio on the mainland will be about 24%, which is lower than the global average and much lower than the 110% of United States and 214% of Japan, and the central government debt burden is relatively light. The Third Plenum of the CPC Central Committee pointed out that it is necessary to establish a long-term mechanism to prevent and resolve debt risks, and further through reform, focus on balancing the administrative and financial powers of the central and local governments, so as to lay a solid fiscal and tax foundation for controlling the scale of local debts and reducing local debt risks. The Central Finance Office pointed out that it is necessary to appropriately strengthen the powers of the central government and increase the proportion of central financial expenditure. Improve the classification and functional positioning of government debt, and optimize the debt structure of central and local governments. This meeting indicates that the central government's support will be strengthened, which is conducive to optimizing credit supply and improving the efficiency of interest rate market pricing, and the expansion of the scale of treasury bonds will also expand the space for the central bank's monetary policy operation, and the fiscal will also have a greater foundation. Previously, the central bank and the Ministry of Finance have set up a joint working group to focus on the smooth operation of the bond market and the central bank's open market operation of treasury bond trading, indicating that the coordination of fiscal and monetary policies has entered the stage of substantive operation.
Support financial institutions to expand credit delivery business, and make forward-looking preventive measures against potential pressures and risks. Special treasury bonds will be issued to support large state-owned commercial banks in replenishing their core Tier 1 capital. It is the first time since 1998 that it has injected capital directly into the four major banks in the form of special treasury bonds. In 1998, the Ministry of Finance issued special treasury bonds to inject 270 billion yuan into the four major banks, which were used to enhance the risk management capacity of the four major banks after the Asian financial crisis and meet the Basel Accord capital adequacy ratio of 8%. At present, the decline in credit growth and the potential net interest margin pressure of some commercial banks in the context of interest rate cuts are not only to further support the bank's credit delivery capacity, but also to prevent potential risks and build a solid financial safety net.
Strengthen financial support for real estate acquisition and storage policies. The superimposed use of special bonds, special funds, tax policies and other tools to support and promote the real estate market to stop falling and stabilize. The Ministry of Finance said that the next step will be to study and introduce incremental measures conducive to the steady development of real estate, allow special bonds to be used for land reserves, support the acquisition of stock housing, and optimize the supply of affordable housing; Optimize and improve relevant tax policies in a timely manner. Combined with the previous policy measures of the central bank to strengthen the re-lending support for affordable housing, the process of this round of real estate acquisition and storage is also expected to be further accelerated.
Strengthen employment security and build a solid bottom line for people's livelihood. Since the beginning of this year, the central government has allocated 66.7 billion yuan in employment subsidies to support local governments in the employment of key groups such as college graduates and vocational skills training. From January to September, the national education expenditure was 3 trillion yuan. The basic pension level of retirees will be increased according to the proportion of 3% of the country, and the minimum standard of basic pension for urban and rural residents will be greatly raised. The financial subsidy standard for basic public health services will be raised to 94 yuan per person per year, and the financial subsidy standard for basic medical insurance for urban and rural residents will be raised to 670 yuan per person per year. Looking ahead, the government is expected to continue to increase its support for the "three guarantees" at the grassroots level, increasing residents' income and promoting consumption.
On the whole, although the meeting did not disclose the specific figures of the scale of the incremental policy due to procedural limitations, it made a clear and positive policy response to the issues that the market has been concerned about for several years, such as local government bonds, central government leverage, and real estate risk resolution, and further reaffirmed to the market the policy framework for the government to accelerate the progress of reform and risk reduction, which is conducive to boosting market confidence, improving the expectations of the main body, and laying a good foundation for improving the effect of subsequent stimulus policies.
risk analysis
There may be a risk that entities at all levels do not have a deep understanding of the policy and do not implement it in place, and the policy effect may not be as expected. The downward pressure on the economy may continue, and the time for real estate bottoming may exceed expectations, dragging down the overall macroeconomic trend. There may be a time lag in the recovery of consumption and investment, and the risk of deflation remains.
The impact of monetary policy in Europe and the United States may exceed expectations, dragging down global economic growth and asset price performance. Overseas demand is showing signs of decline, and the risk of recession in developed economies such as United States and Europe is not abating, which may drag down the mainland's export industries and enterprises to invest overseas.
Geopolitical conflicts remain uncertain, and turmoil in the Middle East, Russia and Ukraine and other regions has disrupted global economic growth prospects and market risk appetite.