Construction of the 597-meter-tall Goldin Financial 117 Tower in Tianjin, China, began in September 2008 but is still not completed in this photo taken on August 28, 2024.
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BEIJING — A press conference held by China’s Ministry of Finance over the weekend highlighted how to focus on solving the problem local government debt problemrather than the stimulus the market has been waiting for.
Finance Minister Lan Foan proposed four measures in his opening speech on Saturday. The first is to strengthen support for local governments to resolve debt risks. It was only after he outlined these four points that Lan teased that the country was looking to increase debt and deficit.
“This press conference is consistent with our view that resolving local government financing difficulties is a top priority,” Robin Xing, chief China economist at Morgan Stanley, and his team said in a report on Sunday. They also expect the central government to It will play a greater role in debt restructuring and stabilizing the real estate market.
“However, we believe the expansion of consumer support and social welfare spending is likely to remain gradual,” Morgan Stanley analysts said.
The slump in China’s real estate market has cut into an important source of revenue for local governments, many of which financial difficulties even before Need to spend on Covid-19 measures. At the same time, sluggish consumption and slow overall growth have also raised concerns about More fiscal stimulus.
Chinese economic think tank CF40 said in a report on Saturday that the four policies announced by the Ministry of Finance are more focused on solving structural problems.
“They are not specifically aimed at solving macroeconomic problems, such as by solving problems such as insufficient aggregate demand or falling price levels. Keynesian style The report said fiscal expansion refers to expectations of increased government intervention.
CF40 estimates that China will not need additional fiscal funds to achieve its full-year growth target of around 5%, as long as its announced spending is met by the end of the year.
Local governments drag down domestic demand
Finance Minister Lan did say on Saturday that the central government would allow local governments to use 400 billion yuan ($56.54 billion) of bonds to support spending on wages and basic services.
He added that a large plan to address the hidden debt of local governments would be unveiled in the near future, without specifying when. Lan claimed that the level of implicit debt at the end of 2023 was half that of 2018.
Historically, local governments have shouldered more than 85% of expenditures but only received about 60% of tax revenues. Rongding Group said that in 2021.
Local government finances are tight “causing downward pressure on prices,” The International Monetary Fund said in a report on China on August 30.
this core consumer price indexExcluding volatile food and energy prices, prices in September rose 0.1% from the same period last year. This was the slowest since February 2021, according to the Wind Information database.
For Morgan Stanley, addressing local government debt is a “critical step” in halting the downward trend in prices – almost as important as stimulus measures aimed at boosting demand.
Waiting for another meeting
Investors are awaiting China’s National People’s Congress meeting, expected at the end of this month, after a series of policy releases over the past few weeks. China’s legal procedures require it to approve changes to the state budget. Last year’s meeting, which ended on October 24, oversaw rare increase According to state media reports, the fiscal deficit rose to 3.8% from 3%.
Analysts are divided over the exact amount of financial support needed, if any.
“Whether it’s $2 trillion or $10 trillion, it actually doesn’t make much difference to us,” M&G Investments fund manager Vikas Pershad said on CNBC on Monday.Squawk Box Asia“Our bet on China is a multi-year bet. The valuation of the Chinese stock market is too low.”
He stressed that regardless of the scale of stimulus, the policy direction is “correct.”
Pershad talks about Buying opportunities in Chinese stocks since January But he said Monday that the latest flurry of activity in the area did not make him more active in the industry.
China’s policymakers have largely remained conservative. Unlike Hong Kong or the U.S., Beijing is not handing out cash to consumers after pandemic
Julian Evans-Pritchard, head of China economics at Capital Economics, said at least 2.5 trillion yuan in additional funding is needed to keep economic growth at 5% this year and next. %about.
“Beyond that, I think the real risk is that the economy will continue to slow next year given all the structural headwinds it faces,” he told CNBC on Monday.Squawk Box Asia“.
Evans-Pritchard insisted that fiscal policy was more critical in dealing with the recent recession because China’s other previous support tools, including real estate and credit, were less effective this time.
“It’s difficult to give specific numbers because there’s obviously a lot of discussion about recapitalizing banks and resolving existing local government debt problems,” he said. “If a lot of additional borrowing goes into these areas, it’s not actually going to significantly stimulate current demand.”
—CNBC’s Sonia Heng contributed to this report.
