As the stock market undergoes adjustments, the fiscal incremental policies that the market has been eagerly anticipating are gradually becoming clear.
On October 12th, Finance Minister Lan Foan announced at a press conference held by the State Council Information Office the introduction of four major fiscal incremental policies in the near future:
- A one-time significant increase in debt limits to swap local governments' existing implicit debts, strongly supporting local debt risk resolution;
- Issuing special treasury bonds to support large state-owned commercial banks in replenishing their core tier-one capital, enhancing the banks' risk resistance and credit extension capabilities;
- Leveraging local government special purpose bonds and other tools to support and promote the real estate market to stabilize;
- Increasing support and protection for key groups, enhancing overall consumption capacity.
"Counter-cyclical adjustments are far from just these four points; these are policies that have already entered the decision-making process. We also have other policy tools under study. For example, the central finance still has a significant debt-raising space and a deficit increase space," Lan Foan added.
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Several fiscal and tax experts told Yicai that the fiscal incremental policies announced by the Ministry of Finance fully meet the market's reasonable expectations and are of considerable strength. The finance minister's statements such as "the central finance has significant debt-raising space" have given the market more room for imagination. Although the increase in debt limits requires approval by the Standing Committee of the National People's Congress and cannot provide specific numbers at present, it is expected that the data related to increased debt will be disclosed at the Standing Committee meeting in late October. An important signal revealed by the Ministry of Finance's press conference is that for market concerns such as local debt issues and grassroots fiscal difficulties, the central finance is fully capable and has the space to resolve them.
So, what will be the scale of the increased debt limit to swap implicit debts in the next step? How will the form and impact of the swap be? Will there be an increase in the deficit and more debt-raising?
A trillion-level debt resolution move is about to be launched.Undoubtedly, the most attention-grabbing and short-term impactful measure in the incremental policy released by the Ministry of Finance this time is the support for local governments to resolve debt risks. Currently, local governments are under significant pressure to repay debts, with some facing substantial principal and interest payments. Coupled with the sluggish growth in fiscal revenue in recent years and the unyielding increase in rigid expenditures, the pressure to repay debts has even been transmitted to "ensuring basic livelihoods, salaries, and operations," affecting some government investments.
Lan Fuan introduced that preventing and resolving local government debt risks is a significant issue concerning development and security, as well as the sustainable development of fiscal policy. Since 2024, after going through the relevant procedures, the Ministry of Finance has arranged a debt limit of 1.2 trillion yuan to support local governments in resolving existing implicit debts and digesting government arrears to enterprises. To alleviate the debt repayment pressure of local governments, in addition to continuing to arrange a certain scale of bonds in the newly added special debt limit each year to support the resolution of existing government investment project debts, it is proposed to increase the debt limit by a large scale in one go to replace the existing implicit debts of local governments, and to increase efforts to support local governments in resolving debt risks. The relevant policies will be detailed to the public after going through the legal procedures.
Lan Fuan emphasized that this policy, which is about to be implemented, is the most supportive measure for debt resolution in recent years. This is undoubtedly a timely policy rain, which will greatly reduce the pressure on local governments to repay debts, free up more resources for economic development, boost the confidence of business entities, and consolidate the grassroots "three guarantees."
Yang Zhiyong, director of the Tax and Finance Research Center at the Chinese Academy of Social Sciences, told Yicai that the overall fiscal incremental policy is in line with expectations. The necessary policy intensity can better play the counter-cyclical role of fiscal policy. From the information of the press conference, fiscal policy can be expected. Although some data has not been provided due to legal procedures, the press conference has already stated that the debt limit will be increased by a large scale, and the market and society can have reasonable expectations. In terms of local government debt risk resolution, local governments must actively work hard first, and at the same time, with the help of the central government according to the actual situation, form a joint force to solve problems in development.
"Some market insiders are quite worried about local government debt risks, and this press conference clearly stated that it will introduce the most supportive measure for debt resolution in recent years, which is actually sending a very clear and significant signal to the market, that is, the central finance has the ability and space to promote the resolution of local government debt and other issues," Qiao Baoyun, Dean of the Public Finance and Policy Research Institute at Central University of Finance and Economics, told Yicai.
Many market insiders are very concerned about the scale of the upcoming large debt limit and how to replace implicit debts.
Looking at the debt resolution limits introduced in recent years, the largest one was in 2023, when the central government required the implementation of a package of debt resolution plans to effectively prevent and resolve local government debt risks. That year, the Ministry of Finance arranged for more than 2.2 trillion yuan of local government bond limits to support local governments, especially high-risk areas, to resolve existing debt risks and clear arrears to enterprises, and the local government debt risks were generally alleviated.
Data from the Ministry of Finance shows that by the end of 2023, the balance of implicit debt included in the national government debt information platform was reduced by 50% compared to the 2018 baseline, and the debt risk is controllable.
Wen Laicheng, a professor at Central University of Finance and Economics, told Yicai that for some local governments, it is already difficult to resolve implicit debts by their own means. Therefore, the Ministry of Finance's increase in the debt limit this time, through the form of government bonds to replace implicit debts, reduce the debt of local government financing platforms, and reduce potential default risks and regional fiscal and financial risks. "According to the scale of maturing implicit debts calculated by relevant institutions, it may be necessary to increase the debt limit by about 2 trillion yuan."
Ding Shuang, Chief Economist of Greater China and North Asia at Standard Chartered Bank, told Yicai that in this fiscal incremental policy, the support for local debt resolution policy exceeded market expectations. Since the Ministry of Finance clearly stated that the one-time increase in the debt limit is the most supportive policy for debt resolution in recent years, it is expected that this limit will exceed the 2.2 trillion yuan of 2023, and at least it will not be less than 1 trillion yuan.Vice General Manager of Finda Securities, Hu Hengsong, informed First Financial that according to institutional calculations and in combination with the progress of debt restructuring, the current remaining implicit debt balance is expected to be no less than 10 trillion yuan. The Ministry of Finance has emphasized the increase of a larger amount for debt restructuring, and the scale is expected to be in the range of several trillion yuan.
In fact, from 2015 to 2018, China issued over 12 trillion yuan in government bonds to replace government debt in non-government bond forms, significantly reducing the interest burden of local government debt and effectively alleviating the pressure of debt repayment. Several experts interviewed predict that looking at the cyclical debt restructuring quota of this round, the scale of implicit debt restructuring in the coming years is expected to be larger, and may even be close to the quota of the previous round of bond replacements.
Qiao Baoyun stated that this round of implicit debt restructuring is similar to the 12 trillion yuan bond replacement initiated in 2015, with the purpose of making implicit debts, which are not within the government budget, transparent. By replacing implicit debts with government bonds, these debts are included in the budget, making the previously implicit debts transparent, extending the debt term to reduce the interest burden, and incorporating them into budget management, which is more standardized and conducive to preventing debt risks.
Of course, since the Ministry of Finance did not clearly specify in this press conference whether the increased debt limit for replacing local implicit debts is an increase in local debt limits or an increase in central debt limits, experts have different views. Most experts still predict that it will continue the past practice of increasing local debt limits to replace local implicit debts, essentially extending the local debt term and reducing the interest burden of local debts, but the debt主体 remains the local government. However, there are also different opinions.
Lu Bingyang, Executive Director of the Tax and Finance Research Institute at Renmin University of China, told First Financial that it is unlikely that the form of the upcoming large-scale debt restructuring will be an increase in the quota for local refinancing bonds and the quota for new special local bonds. These two forms cannot truly reduce the local debt burden and may even lead to new debts. Since national bonds generally do not specify the use, and resolving local debt requires special funds for special purposes, it is very likely that the debt restructuring will be in the form of increasing the quota for special national bonds.
"It should be noted that the current resolution of debt risks is a short-term measure, and it is still necessary to focus on the construction of a long-term mechanism to prevent local debt risks, ensuring that provinces and cities with high debt risks can truly reduce debts while maintaining stable development," Lu Bingyang said.
The final increase in debt restructuring quotas and forms still await official subsequent disclosure of specific information, and the National People's Congress Standing Committee meeting in late October will be the first important observation window. The impact of the Ministry of Finance's increased support for local debt restructuring can be anticipated.
Luo Zhiheng, Chief Economist of Guangdong Kai Securities, told First Financial that increasing the debt limit to replace the existing implicit debt of local governments has significant implications for fiscal and economic development. Debt restructuring has made some implicit debts explicit, making debts more open and transparent. Replacing high-cost, short-term implicit debts with lower interest rate, longer-term government bonds, in essence, buys time with space. Therefore, the process of debt restructuring is also a process of reducing risks, reflecting that the essence of debt restructuring is to resolve risks.
Luo Zhiheng believes that debt restructuring has alleviated the pressure on local governments to restructure debts, allowing local governments to free up more financial resources and energy for economic development and the provision of public services. Debt restructuring is conducive to local governments better implementing tax cuts and fee reductions, and phenomena such as "arbitrary fines and charges" in some areas will be significantly alleviated or even eliminated, which is beneficial for improving the business environment.
Whether to increase the deficit still needs to be observed.Compared to increasing the government debt limit to support debt reduction, which still needs clarification, the Ministry of Finance has revealed a significant measure to supplement financial resources at this press conference.
Lan Fuan introduced at the meeting that the central finance has arranged 400 billion yuan from the remaining quota of local government debt to supplement the comprehensive financial resources of local governments, supporting local efforts to resolve the debt of existing government investment projects and to digest the accounts payable owed by the government to enterprises.
Ding Shuang told reporters that since the remaining quota space for local government debt is still 1.5 trillion yuan below the limit, the Ministry of Finance has used 400 billion yuan of it to supplement local comprehensive financial resources. It is highly likely that the general bond quota space of local governments has been used, and since this is within the limit approved by the National People's Congress, there is no need for approval by the People's Congress. However, this move is equivalent to increasing local financial resources by 400 billion yuan. Whether the central finance will increase the fiscal deficit and issue more government bonds in the future is not very clear at the current press conference and remains to be observed.
Among the above four incremental measures, increasing the debt limit to support local debt reduction only adjusts the debt limit and does not increase the fiscal deficit. Issuing special government bonds to support the replenishment of core tier-one capital for large state-owned commercial banks does not count towards the deficit. However, the Ministry of Finance also stated that other incremental policy tools are under study, including the possibility of increasing the deficit space for central finance.
In addition, Lan Fuan said at the above meeting that it is expected that the national general public budget revenue growth will not meet expectations. Many people are concerned about whether the budget target can be achieved this year. Here, I can responsibly tell everyone that China's finance has enough resilience and can achieve a balance of revenue and expenditure and complete the annual budget target through comprehensive measures. Please rest assured!
Data from the Ministry of Finance shows that in the first eight months of this year, the national general public budget revenue was about 14.8 trillion yuan, a year-on-year decrease of 2.6%. The national general public budget expenditure was 17.4 trillion yuan, a year-on-year increase of 1.5%. This is lower than the expected growth rate of the general public budget revenue (3.3%) and expenditure (4%) at the beginning of the year.
Qiao Baoyun said that this year, the economic growth has slowed down, and fiscal revenue is lower than expected. However, to achieve a balance of revenue and expenditure, it is nothing more than increasing some revenue through methods such as asset activation and disposal, and reducing some expenditure by having the government live a tight life, and if the revenue and expenditure gap is higher than the budget at the beginning of the year, it is solved by expanding the deficit and issuing more debt. Overall, China's fiscal maneuvering space is relatively large, and it can fully achieve a balance of revenue and expenditure.
Ding Shuang analyzed that the finance minister's statement that this year can achieve the annual budget target should mean that it can fully achieve the national general public budget expenditure budget scale (about 28.6 trillion yuan), and under the condition that revenue cannot achieve the expected target, to achieve a balance of revenue and expenditure, one possibility is to achieve it by increasing other additional revenue, and the other is to increase the fiscal deficit and issue more government bonds. Whether to increase the deficit and issue more government bonds still needs to be observed.
From past experience, there are many tools for finance to increase revenue to achieve a balance of revenue and expenditure, such as using the budget stabilization adjustment fund; increasing the profits of state-owned enterprises, specific state-owned financial institutions, and monopoly institutions; increasing the revenue from activating existing resources and assets; cleaning up and recovering carried-over funds; and allocating treasury funds, etc.
Experts generally believe that the National People's Congress Standing Committee meeting in October will be an important window to observe whether the fiscal deficit will be increased.