China stimulus aims at its greatest wall of debt

Blank cheque. Chinese policymakers trying to fire up growth in the world’s second-largest economy appear intent on smashing through a wall of debt that poses a systemic financial risk and on not repeating past mistakes in delivering fiscal stimulus. That is some consolation for the fact that Beijing, so far, has mapped out only half of a plan.

At a highly anticipated press conference on Saturday, the Ministry of Finance signaled it is ready to significantly boost spending but it declined to say by how much. The lack of a concrete number will disappoint those looking for quick fixes; Chinese benchmark stock indices including the Hang Seng opened largely unmoved on Monday. To spur consumption, economists reckon the People’s Republic may need to spend up to 10 trillion yuan ($1.42 trillion), or 7% of GDP .

It is another signal that Beijing won’t resort to indiscriminate spending, as it did with a 4 trillion yuan package in the wake of the 2009 global financial crisis. A resulting infrastructure buildout more than a decade ago saddled local government financing vehicles (LGFVs) with debt; the International Monetary Fund pegs this pile at $9 trillion, or 48% of last year's GDP . Instead, the ministry laid out what it calls its “biggest effort” to tackle this unwieldy problem, acknowledging it for the first time as a serious obstacle to growth.

Three of the four new measures announced were aimed at easing local governments' financial burden; these authorities are effectively responsible for over 80% of total government spending, including on basics like pensions and healthcare.

There will be a one-time, large-scale expansion of an existing debt swap programme local governments use to issue bonds to replace LGFV debt; the central government will sell special sovereign bonds to replenish state lenders, who will most likely absorb the new local government debts; and provinces can use proceeds from special bond issues to purchase housing units or land to stabilise the property market. This crystallises a reversal of roles played in 2009. This time, the central government will borrow to take on fixed asset investments.

The ministry promises more fiscal measures will follow, though it is unclear what China will spend money on, and how it will generate revenue to fund any additional debt. For now, policymakers are focusing on fixing the economy's foundations before rushing to induce demand.

Context News

The Ministry of Finance on Oct. 12 announced four major “countercyclical” fiscal measures to boost growth. There will be a one-time, large-scale expansion of a debt swap programme that allows local governments to issue special bonds to replace implicit debts. Local governments will also be allowed to sell more bonds to buy land and housing units from developers. Meanwhile, Beijing will sell more special sovereign debt to recapitalise banks. The central government also pledged to increase support for low-income individuals and students to boost consumption. Finance Minister Lan Foan said the central government has a “relatively large” amount of room to increase its deficit and to issue more debt. He also said more fiscal stimulus is being studied by the ministry.