Funding issue: A Chinese flag flies outside a residential compound in Beijing. Market attention is focused on the possibility of fresh public borrowing and spending for this year, which several economists consider unlikely given that there are only two months left to the year. — AFP
SHANGHAI: China’s top legislative body is reviewing a proposal to move some off-balance-sheet debt of local governments to their official accounts, paving the way for the first mid-year increase in the borrowing limit since 2015.
The National People’s Congress Standing Committee (NPCSC) met on Monday to discuss the plan to lift local governments’ debt ceiling to swap out their hidden debt, according to Xinhua News Agency.
The move, which policymakers in Beijing had hinted at, aims to reduce the financial burden of local officials.
Investors are closely watching the legislative meeting from Nov 4 to Nov 8 for signs of new stimulus to revive the world’s second-largest economy.
Economists expect lawmakers to approve a programme to swap so-called hidden debt over several years, with forecasts ranging from about six trillion to 10 trillion yuan. Xinhua didn’t provide details on the proposal or indicate if any other fiscal measures were discussed.
The news agency typically provides a summary of the bills reviewed by legislators on the first day of the NPCSC meeting and then publishes a list of items approved by the legislature on the final day.
Chinese stocks were volatile in early trading yesterday, with the benchmark CSI 300 Index falling as much as 0.5% before climbing 1.1% as data showed a pick up in China’s services activity in October.
Economists are divided on whether additional fiscal measures beyond the debt swap will be announced this week, with some suggesting that Beijing needs to manage expectations more carefully to mitigate the potential impact of the upcoming US presidential election on Chinese asset prices.
“Releasing details about fiscal policy from day one may be intended at dealing with the potential volatility by boosting market expectations,” said Australia & New Zealand Banking Group Ltd senior China strategist Xing Zhaopeng.
This will help ensure that investors are not overly affected by external events, such as the US election, he said, anticipating that more policies related to this year’s budget will be announced in the coming days.
We think the session will likely announce some top-line figures for the four major components indicated at a Finance Ministry briefing in mid-October – namely, local government debt restructuring, housing-market stabilisation, injections of bank capital and support for domestic demand.
Other analysts are more cautious, expecting the authorities to refrain from introducing additional policies until later in the year.
“If history is any guide, the magnitude of the debt ceiling adjustment may be the only answer the market will get when the NPCSC meeting closes,” Huaxi Securities Co analysts including Tian Lemeng wrote in a note Tuesday.
Any further measures might not be revealed until after the Central Economic Work Conference next month, they said.
The debt swap programme was telegraphed by Finance Minister Lan Fo’an, who announced last month that China would soon launch its biggest effort in years to address risks from local government debt.
The International Monetary Fund estimated there was about 60 trillion yuan (US$8.5 trillion) of local hidden debt as of last year.
Bloomberg News reported previously that China was considering allowing local authorities to issue as much as six trillion yuan in bonds through 2027 to refinance their hidden debt.
Most of these borrowings are tied to entities known as local government financing vehicles, which borrow on behalf of provinces and cities to finance investment in infrastructure.
While the debt swap may not satisfy market demands for more central government borrowing and consumer stimulus, it would free up cash for local governments to spend on various needs, such as employee salaries and construction projects.
Since the Global Financial Crisis, local officials have played a major role in boosting economic growth by building infrastructure projects, as well as promoting urbanisation and housing demand. — Bloomberg
