Source: Zhao Wei Macro Exploration
Author: Zhao Wei, Yang Fei, Mu Renwen (Zhao Wei is the Chief Economist of Kaiyuan Securities and a director of the China Chief Economist Forum)
Report highlights
The July Politburo meeting called for improving the "effectiveness of fiscal policy" and putting fiscal back-loading, what is the impact on the economy? This article is combed and can be used for reference.
A question: Why was the fiscal expenditure at the beginning of the year slow? The drag on special bonds is obvious, which is related to the strengthening of local debt supervision
At the beginning of the year, the broad fiscal expenditure was obviously slow, and it was obviously dragged down by special debt. From January to May, the proportion of generalized fiscal expenditure in the annual budget was 32.3%, a new low in the same period since 2016. Among them, the proportion of general fiscal expenditure in the annual budget was 37.4%, slightly higher than the same period in 2020, and the proportion of government fund expenditure in the annual budget was 22.6%, lower than the proportion of more than 25% in the same period in the past two years. The slow expenditure of government funds is related to special bonds, and the issuance of new special bonds from January to May accounted for 16.0% of the annual quota, which is lower than the proportion of more than 40% in the same period in the past two years.
The slow pace of special bond issuance is related to factors such as the return of policy focus, the late issuance of quotas, and the tightening of project review. Under the accelerated normalization of the economy, the focus of policy has returned to "adjusting the structure" and "preventing risks", and the necessity and urgency of fiscal "stability maintenance" have declined; the Ministry of Finance only issued the first batch of new quotas for local bonds in March, which is significantly later than the previous two years, and has not set clear issuance schedule requirements. At the same time, the authorities have strengthened the supervision of local government debt, strictly reviewed the quality of special debt projects and controlled risks; the quality of projects is not up to standard, making the actual issuance of special bonds lower than planned.
Second question: The impact of slow fiscal expenditure on the start of the project? The impact on funds and construction of projects under construction is limited
High-quality projects, especially industrial projects, are less dependent on financial funds, and the start and completion of construction are better than in the same period before the epidemic. In 2021, the planned investment scale of major projects in 26 provinces and cities will reach 11.3 trillion yuan, an increase of 20.6% over 2020, the quality of major projects is higher, the number of industrial projects is more (the number accounts for 52.9%), and the dependence on fiscal funds is low, so the project investment progress is relatively less affected by changes in fiscal expenditure. Data released by Shandong, Jiangxi and other provinces and cities show that the operating rate and investment completion rate of major projects in the first quarter were higher than those in the same period in 2019.
Government-led projects under construction are given priority to special debt support, less affected by project review, and there is still pre-funding support at the beginning of the year. In the past few years, the expansion of special debt has made the projects under construction accumulate more, and the policy in 2021 clearly emphasizes that special debt will give priority to supporting projects under construction, and the proportion of projects under construction in the first five months reached 64%, an increase of 13 percentage points over the first half of 2020. Affected by the late start of the project in 2020, the use of funds in the early stage may be slow, and it still supports the construction of the project at the beginning of the year; since May, the issuance of special bonds has accelerated, and the financing needs of the project have been continued to a certain extent.
Three questions: The impact of fiscal "backwards" on the economy? It may affect the economic slope, or it may be difficult to change the trend
Fiscal priority support for people's livelihood and industry, and decline in support for traditional infrastructure investment; while project quality, debt pressure, etc., determine the limited leverage effect of fiscal funds. Under the "ebb tide" of the policy, the fiscal emphasis is on the "three guarantees" and accelerating the promotion of industrial transformation, etc., the general financial investment in social security and other areas of people's livelihood has increased significantly, the proportion of special debt invested in social undertakings and other fields has increased, and the proportion of infrastructure-related related has declined. The quality of the project, debt suppression, etc., make the leverage leveraged by financial funds limited, such as the fundraising of special debt projects, more than 90% comes from special bonds and financial capital.
Combined with historical experience, the fiscal is not the core driver of the economy, and the fiscal "backward" may affect the economic slope and make it difficult to change the trend. Under the policy of accelerating economic transformation, the growth center of traditional infrastructure investment has shifted significantly downward, and the pull on economic growth has weakened significantly; the experience of the past few years shows that the acceleration of fiscal expenditure has not changed the original growth trend of the economy. During the year, the economic high point has passed, the trend has emerged, the export and real estate investment demand that repaired quickly in the early stage has peaked, and the internal vitality can repair the differentiation, relying only on fiscal expenditure or it is difficult to change the economic trend in the second half of the year.
Risk Warning: Debt risk exposure, insufficient project reserves.
The body of the report
A question: Why was the fiscal expenditure at the beginning of the year slow?
At the beginning of the year, the broad fiscal expenditure was obviously slow, and it was obviously dragged down by special debt. From January to May, the two-year compound growth rate of generalized fiscal expenditure was only 0.9%, lower than the growth rate of revenue by 4.9%, and the proportion of expenditure in the annual budget was 32.3%, hitting a new low in the same period since 2016. Among them, the proportion of general fiscal expenditure in the annual budget was 37.4%, slightly higher than the same period in 2020, and the proportion of government fund expenditure in the annual budget was 22.6%, lower than the proportion of more than 25% in the same period in the past two years. The slow expenditure of government funds is related to special bonds, and the issuance of new special bonds from January to May accounts for 16.0% of the annual quota, which is lower than the proportion of more than 40% in the same period in the past two years (for a detailed analysis, see "Fiscal Expenditure, Why is It Slow?"). 》）。
The pace of special bond issuance is slow, or it is related to factors such as the return of policy focus and the late issuance of quotas. Under the accelerated normalization of the economy, the focus of policy has returned to "adjusting the structure" and "preventing risks", and the necessity and urgency of fiscal "stability maintenance" have declined. The Ministry of Finance only issued the first batch of new quotas for local bonds in March, significantly later than the previous two years, while the first batch of quotas in 2019 and 2020 were issued in advance at the end of the previous year; at the same time, the Ministry of Finance did not set clear issuance schedule requirements, while the past three years required basic completion of issuance by September or October.
In the early stage, the special bond funds are still "idle", and the project review is becoming stricter, which may also affect the pace of special bond issuance. Some provincial audit reports show that there is a certain "idle" phenomenon in special bond funds, for example, 7.8% of Guangdong's special bond funds in 2019 were unused in that year, and the proportion of unused funds in Fujian and Sichuan was higher, more than 25%; the 2021 local bond issuance notice clearly requires that "bond funds should be avoided from staying in the national treasury for a long time". The authorities have also significantly strengthened the supervision of local bonds, implemented the "penetrating" management of projects, and strictly reviewed whether the project income can cover the principal and interest, whether the preparation work is complete, and whether the investment field is accurate. In this context, the quality of the project is not up to standard, so that the actual issuance scale of special bonds in some regions is lower than the previous plan.
Second question: The impact of slow fiscal expenditure on the start of the project?
Government-led projects under construction are given priority to receive special debt support and are less affected by project review. In the past few years, the expansion of special bonds has made the accumulation of projects under construction more, and the 2021 government work report clearly emphasizes that special bonds give priority to supporting projects under construction, accounting for 64% of projects under construction in the first 5 months, an increase of 13 percentage points over the first half of 2020. Data released in some regions show that the operating rate of special bond projects in the first five months of 2021 will average 95%, which may mean that projects under construction are limited by the slow issuance of special bonds.
The impact of fiscal expenditure on projects under construction may be limited, and the early fundraising may still support the construction of projects at the beginning of the year. Under the background of the epidemic, the special bond projects in 2020 started relatively late, and the scale of special bonds was significantly increased, combined with the experience of previous years, there may be a certain proportion of "idle" special debt funds in 2020, which will support the construction of the project in early 2021. The average construction period of special bond projects is about 3-5 years, and the financing is raised every year during the construction period, combined with the previous special bond fundraising, the financing needs of projects under construction began to be gradually released in May, driving the issuance of special bonds to accelerate.
Three questions: The impact of fiscal "backwards" on the economy?
Fiscal priority is given to supporting people's livelihood and industries, and support for traditional infrastructure investment has declined. The exit direction of fiscal policy is clear, focusing on ensuring employment, people's livelihood, and market entities; "making good use of the window period with less pressure to stabilize growth", increasing investment in scientific and technological innovation, education and other fields, accelerating industrial transformation and upgrading, and reducing investment in traditional infrastructure. Since the beginning of the year, the general financial investment in education, social security, health and other areas of people's livelihood has increased significantly; the proportion of special debt invested in infrastructure-related areas has declined, while the proportion of investment in social undertakings, shed reform and other fields has increased.
The quality of the project and the debt pressure determine the limited leverage effect of fiscal funds.
In the first five months of 2021, more than 90% of the funds raised by special debt projects came from special bonds and financial capital, which means that the project basically has no external financing. The leverage effect of special debt projects is limited, on the one hand, due to the quality of the project, the income of special debt projects is low, and it is difficult to attract social funds; on the other hand, it is related to the increase in debt suppression of urban investment platforms, and the proportion of urban investment bond fundraising in the first 5 months that is indicated for "borrowing new to repay the old" is as high as 86%, up 5 percentage points from 2020.
After research, we found that:
(1) At the beginning of the year, the broad fiscal expenditure was obviously slow, and it was obviously dragged down by special debt; it was related to factors such as the return of the policy center of gravity, the late issuance of quotas, and the tightening of project review.
(2) The impact of slow fiscal expenditure on project start is limited. High-quality projects, especially industrial projects, are less dependent on financial funds, and the start and completion of construction are better than in the same period before the epidemic. Government-led projects under construction are given priority to special debt support, less affected by project review, and there is still pre-funding support at the beginning of the year.
(3) Fiscal priority support for people's livelihood and industry, and decline in support for traditional infrastructure investment; and project quality, debt pressure, etc., determine the limited leverage effect of fiscal funds. Combined with historical experience, the fiscal is not the core driver of the economy, and the fiscal "backward" may affect the economic slope and make it difficult to change the trend.