The Chinese government is said to be considering issuance in the next five years of 4 trillion yuan (US$561 billion) in special treasury bonds in order to fund the purchase of unsold homes and idle sites in an effort to reduce inventory in the markets and support property prices.
The issuance of these bonds will come on top of the previously-reported issuance of 6 trillion yuan in ultra-long special treasury bonds, which will be implemented over the next three years, Reuters reported.
It is expected that these long-term money printing schemes will be discussed in the coming standing of the National People’s Congress (NPC) Standing Committee between November 4 and 8.
The meeting was originally scheduled for late October but it was postponed to November with some media reports saying that Beijing wants to make its final decision after the United States presidential election.
In case the election’s winner is Republican candidate Donald Trump, who vowed to impose a 60% tariff on all Chinese goods, China may need a stronger stimulus package to maintain its economic growth for the next few years, Reuters reported, citing two unnamed sources.
Mysterious local debt figure
The news about China’s stimulus package came after Li Jianjun, vice president of the Central University of Finance and Economics and an economist, said in a public speech at the Financial Street Forum 2024 in Beijing on October 18 that China’s debt-to-GDP ratio had increased to about 103% as of the end of June this year.
Li’s comments were reported by foreign media only this week. They seemed different from Beijing’s propaganda in recent years claiming that China’s debt situation remained healthy.
Li said China’s local government financing vehicles (LGFV) loans and related shadow loans had grown to 57.16 trillion yuan as of June 30.
Since the early 2010s, local governments, property developers and LGFVs had formed an iron triangle to benefit from a decade-long property bubble, which burst in 2021 with the default of Evergrande Group.
It is an open secret that China has so far accumulated what many foreign economists estimate to be more than 50 trillion yuan of LGFV loans.
But it is the first time for this figure to be disclosed in an official way: The Financial Street Forum is jointly organized by the People’s Bank of China (PBoC), Xinhua News Agency and other financial regulators. Besides, the Central University of Finance and Economics, in which Li is serving, is co-sponsored by the Ministry of Finance, the Ministry of Education and the Beijing municipal government.
Li said China’s total debt, including 30 trillion yuan of central government loans and 42.23 trillion yuan of legally-issued local government loans, totaled 129 trillion yuan, which is more than China’s 2023 GDP of 126 trillion yuan. He added that the figure excludes the shadow loans guaranteed by local governments.
He stressed that China’s debt-to-GDP ratio is now above the globally-recognized 60% representative threshold for high debt levels.
He said more than 60% of Chinese provinces and municipalities, including Tianjin, Chongqing, Guizhou and Gansu, saw their debt-to-GDP ratios exceeded 300%. He said it is important to define clearly the role of local governments and markets and reduce governments’ influence in debt issuances.
Between the establishment of the People’s Republic of China in 1949 and the first land auction in Shenzhen in 1987, all land use had to be approved by the Chinese government.
Hong Kong Chief Executive Leung Chun-ying said in a press conference in 2018 that he had helped introduce Hong Kong’s land auction system to China and contributed to the country’s land reform and opening up.
It was supposed to be a system in which local governments could receive fiscal revenue and manufacturers and property developers could get land resources. But most local governments ended up becoming overly reliant on land sales revenue to maintain operations.
Fareast Credit, a Shanghai-based credit rating agency, said in a research report in April 2022 that land sales revenue accounted for 41.47% of local governments’ fiscal income on average.
It said the levy of property tax would not be enough to offset the decline in local governments’ land sales revenue during a property down cycle. It said the central government should allow local governments to enjoy a bigger share in the country’s business and consumption taxes.
300 million migrant workers
On September 21, Liu Shijin, a top economist and the former deputy president of the China State Council’s Development Research Center, said in a public event that the central government should raise 10 trillion yuan by issuing ultra-long special treasury bonds within one to two years.
He said the central government should use the proceeds from bond issuance to buy up unsold homes from the markets in the short run and accelerate urbanization over the medium term.
His comments, followed by the PBoC’s interest rate and reserve requirement ratio cuts, had contributed to the stock market rally in mainland China and Hong Kong between late September and early October.
Caixin reported on October 14 that the Finance Ministry planned to issue 6 trillion yuan of ultra-long special treasury bonds in the coming three years to ease the local debt crisis.
On Tuesday, Reuters confirmed that there will be another 4 trillion yuan bond issuance to fund the purchase of unsold homes over the next five years.
Coincidentally on the same day, Liu commented about China’s stimulus package at a forum organized by Tsinghua University’s Institute for China Sustainable Urbanization.
He said the new money from bond issuance should be spent on providing basic needs for about 300 million migrant workers, rather than subsidizing urban residents to “buy a few more pieces of bread.”
He admitted that more than 900 million people in China are low income. He said China needs to boost its middle income population from the current 400 million to 800-900 million in the next decade in order to maintain moderate economic growth for a longer term and overcome the limitations of insufficient demand.
Meanwhile, China’s economy also showed signs of stabilizing after Beijing announced its stimulus package.
The official manufacturing purchasing managers’ index (PMI) increased to 50.1 in October, higher than a forecast of 49.9 by economists, according to the National Bureau of Statistics. Non-manufacturing PMI rose to 50.2 in October, up from 50 in September.
Read: Market unsatisfied with Beijing’s 6 trillion yuan stimulus
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