Until we see the total package, it’s too early to brush aside Xi’s resolve to boost the economy. — Bloomberg
IT’S been all thunder, no rain since China’s President Xi Jinping abandoned his fiscal austerity and embraced economic stimulus in late September.
While minister-level officials have hosted a parade of press briefings, none spelled out a magic number.
It’s been disappointing to stock traders that had expected a package to the north of 10 trillion yuan (US$1.4 trillion).
Nonetheless, statements from top policymakers, as well as new tools they are creating, such as the central bank’s re-lending facilities to help companies buy back their publicly listed shares, are sending strong signals that a supercharged package is in the works.
The recent policy pivot centres around three aspects: The government is planning to improve municipal finances and fire up local fiscal power, buy unsold homes to stabilise property prices and capitalise big banks so they are willing to lend in a weak economy.
In a briefing, the Finance Ministry promised the largest one-time local debt swap in recent years, without giving out any numerical guidance.
But we can look into the past to divine the future.
Between 2015 and 2018, under Xi’s leadership, China spent about 12.2 trillion yuan to alleviate hidden local debt.
By comparison, early in the year, Beijing had allotted only 1.2 trillion yuan for debt swaps.
Improving municipal finance might lift the economy faster than writing stimulus cheques to consumers.
Local governments will be able to settle late payments to their suppliers, which in turn can stay afloat and keep the lights on for their employees.
In another unusual move, the Finance Ministry said that local governments will be able to buy unsold homes with proceeds from special-purpose bonds, which have been restricted to infrastructure and environmental projects.
This means that four years into the property downturn, China has finally settled on a funding channel to mop up oversupply in the housing market.
As such, Beijing may allow more quota for these special-purpose municipal bonds, which currently stands shy of four trillion yuan a year.
Last but not least, the central government will be issuing ultra-long bonds, which are rare and can be used for any purpose, to add capital to the largest banks.
Proceeds from these notes may even be deployed for municipal debt swaps.
Understandably, when there are no concrete official announcements, numbers floated in the media can create a lot of confusion.
For instance, local governments might just be allowed to issue up to six trillion yuan in bonds to refinance their off-balance-sheet debt over the next three years.
At first glance, that number is hardly impressive compared to the quota handed out last year.
But keep in mind that the Chinese government is a complex apparatus with many tools in hand.
Local debt swaps, for one, can be achieved via municipal government special refinancing bonds, or even ultra-long bonds issued by the central government, among others.
Until we see the total package, it’s too early to brush aside Xi’s resolve to boost the economy.
Figuring out China’s stimulus package is like doing a puzzle.
We already know the outline, but don’t have the pieces together yet.
So it’s time to think of China as a distressed asset: The world’s second-largest economy can still yield handsome returns, but one must be patient. — Bloomberg
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. The views expressed here are the writer’s own.
