Credit：Visual China

The sixth session of the 14th National People's Congress Standing Committee (NPCSC) passed a decision to authorize the State Council, the top executive body, to issue new sovereign debt and alter the central government’s annual budget in 2023, the state media Xinhua News Agency reported on Tuesday.

The decision allows the Ministry of Finance to issue new debt worth of RMB1 trillion (US$137 billion) in the fourth quarter of the year. All the new issuance is made to fund the local government for post-disaster recovery and reconstruction and improvement in weaknesses in disaster prevention, reduction, and relief, so as to comprehensively strengthen China’s ability to withstand natural disasters. The new debt financing is expected to increase the annual budget deficit to gross domestic product (GDP) to 3.8% from 3%, and all of it will be allocated to local governments through transfer payments, out of which the first batch of RMB500 billion is set to be used this year, and the rest for use next year.

The NPCSC also approved the State Council to allocate some of the new local government bond quota in advance, allowing local governments to front-load part of their 2024 bond quota to maintain steady investment, expand domestic demand and strengthen weak links. The State Council can determine the amount a local government could borrow ahead of time, and the framework would last for four years, through to the end of 2027.

According to the Ministry of Finance, the new debt will fund eight major areas: post-disaster recovery and reconstruction, key flood control projects, natural disaster emergency response capacity improvement projects, other key flood control projects, irrigation area construction and renovation and key soil erosion control projects, improvement initiatives for urban drainage and flood prevention,  the comprehensive prevention and control system construction projects for key natural disasters, and high-standard farmland construction in Northeast China and disaster-stricken areas in the Beijing-Tianjin-Hebei region.

The economic stimulus of the upcoming 1 trillion-yuan debt financing may not visible until 2024, given a time lag between the issuance, application of funds and the financing of key areas to form physical workload, Shenwan Hongyuan Securities said at a note following the announcement of new debt issuance. The Chinese brokerage firm expected the debt financing will directly boost traditional infrastructure projects, and such drive combining with the rapid growth of new infrastructure will bring a growth of more than 15% in investments in broad-based infrastructure in 2024.

Official data released last week showcased China’s economy has gained momentum in the third quarter of this year. The National Bureau of Statistics (NBS) said GDP grew 4.9% year-over-year (YoY) that quarter, beating economists’ estimated 4.6. On a quarterly basis, GDP expanded by 1.3%, compared with the 0.8% growth in the previous quarter. Retail sales and industrial output also topped the Wall Street expectation. Retail sales rose 5.5% YoY and industgrial production up 4.5% YoY. But the property market still outweighs economic recovery. Property investment tumbled 9.1% from January to September YoY, representing a YoY decline of 19.77% in September after a 23.95% fall in previous month.

Why did Chinese government decide to reinforce stimulus despite the stronger-than-expected GDP in the past quarter?  Shenwan Hongyuan’s note believed the new debt financing could stem from the government’s objective understanding of increasing pressure on economic growth next year, especially a clearer judgment on property investment. To front-load part of bond quota and transfer some deficits to this year will make more room for the fiscal stimulus next year, and the fiscal policy will become more flexible in case of economic support, the note said.

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