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China Monetary Policy: support for a slowing economy.

China's top parliament body has approved a 1 trillion yuan ($137 billion) sovereign bond issue and passed a bill to allow local governments to frontload part of their 2024 bond quotas in a move to support the economy. Funds raised from the new sovereign bonds will support the rebuilding of disaster-hit areas in the country and improve urban drainage prevention infrastructure to boost China's ability to withstand natural disasters, state news agency Xinhua said.


That will widen the country's 2023 budget deficit to around 3.8% of gross domestic product from a previously set 3%. Local governments had been told to complete the issuance of the 2023 quota of 3.8 trillion yuan in special local bonds by September to fund infrastructure projects. The government has not disclosed the size of local governments' 2024 frontloaded bond quotas.



The aim is to drive more domestic spending and “further cement the recovery momentum of the Chinese economy,” the official Xinhua News Agency quoted Zhu Zhongming, a vice minister of finance as saying. “This decision suggests a commitment to supporting economic growth and addressing fiscal challenges at various levels of government. It also hints at a potential future shift in China’s fiscal approach.” Chinese state media said the 1 trillion yuan in central government issuance is set to be transferred to local governments in two parts, half for this year and half for next year.


However, officials said the funds would not be channeled into China's ailing property sector, which has weighed heavily on growth as developers struggled to meet repayment obligations for massive debts while demand has weakened.


Property market drag

S&P Global Ratings said in a separate report Monday that if real estate sales drop dramatically next year, real gross domestic product growth will fall to 2.9% in 2024. The firm currently predicts a more modest 5% decline in property sales next year — after an anticipated 10% to 15% drop this year.


After easing a crackdown on property developers’ high reliance on debt for growth, Beijing has focused on ensuring the delivery of apartments, which are typically sold ahead of completion in China.


About 80% of residential sales in 2023 were of homes still under construction, S&P Global Ratings said in a report this month. China’s property slump is closely tied to local government finances. According to [People’s Bank of China] data, the central government’s outstanding debt is currently about RMB27trn, while we estimate local governments owe an exceptional balance of RMB87trn, including both explicit and hidden debt.


The world's second-largest economy grew faster than expected in the third quarter, improving the chances that Beijing can meet its growth target of around 5% for 2023. But economists say persistent drag from the property sector still weighs on the economic outlook. The property market collapse and the continued contraction in land sales revenue has exacerbated debt pressures on local governments, which has prompted Beijing to roll out a raft of measures to reduce the debt risks of local governments.


It is rare for the central governments fiscal plans to be revised outside the usual budget cycle, so this move signals clear concern about near-term growth. China has previously let local governments issue bonds ahead of the annual session of parliament, which approves government budget plans and is usually held in March.


The International Monetary Fund this month also cut its forecast for China’s growth in 2024 to 4.2%.






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