The big move to save the city is finally here!
On October 24, the sixth meeting of the Standing Committee of the National People's Congress voted and passed a draft resolution approving the State Council's additional issuance of treasury bonds and the 2023 central budget adjustment plan. The issuance of treasury bonds will be managed as special treasury bonds, which will be mainly used to support post-disaster recovery and reconstruction, make up for the shortcomings of disaster prevention, mitigation and relief, and enhance the mainland's ability to resist natural disasters as a whole.
The central government will bear the responsibility for repaying the principal and interest on the additional treasury bonds, and all of them will be listed as the central fiscal deficit. The central government will issue an additional 1,000 billion yuan of treasury bonds in 2023 in the fourth quarter, and all the funds raised will be arranged to local governments through transfer payments, with 500 billion yuan planned to be used this year and 500 billion yuan carried forward to next year. The national fiscal deficit will increase from 3.88 trillion yuan to 4.88 trillion yuan, and the deficit rate is expected to increase from 3% to about 3.8% in 2023.
There is a lot of room for the central deficit to increase, and this transfer will help alleviate the problem of mismatch between the financial power and the power of the central government. As of Q1 2023, the deficit rate of the central government in the mainland is only 21.40%, far lower than the overall government deficit rate of 51.50%, and compared with the deficit rate of 67.40% in emerging markets and 91.80%/110.10% in developed countries such as Europe and the United States. Compared with local governments with declining revenues and debt-ridden, the central government has a stronger ability to raise funds, and it is one of the few entities that has the ability to increase leverage and the space to increase leverage. The issuance of additional treasury bonds to support local construction can alleviate the financial pressure of local governments, optimize the structure of local debts, and also help make up for shortcomings, strengths and weaknesses, benefit people's livelihood, improve people's lives, and increase social well-being.
GDP grew by 4.9% in the third quarter, breaking through the 3% deficit constraint to send a positive signal and stabilize market expectations. Due to multiple unfavorable factors such as the long-tail effect of the epidemic, the decline in overseas demand, and the stall of real estate sales, the domestic growth momentum is insufficient, and the recovery slope is slowing down. However, after a series of steady growth policies continued to land, the economic data in the third quarter finally showed an overall improvement trend, the manufacturing PMI rebounded above the boom and wither line in September, the PPI data picked up for 4 consecutive months, and the level of economic prosperity increased. GDP growth in the third quarter exceeded expectations by 4.9% year-on-year, and there was little pressure to complete the annual growth target of 5%. At present, an additional 1,000 billion yuan of treasury bonds will be issued, raising the deficit rate to the level of 3.8%, which is basically the same as the 3.6% during the epidemic in 2020, indicating that in the current special environment, the hard constraint of the 3% deficit rate has been greatly reduced, and the policy flexibility has been improved, which has further opened up the market's imagination space for the continuous development of the follow-up active fiscal policy, which will help reverse the market's pessimistic expectations for the future.
The incremental fiscal policy has been strengthened to improve efficiency, and to accumulate strength in advance to boost demand and support recovery. According to General Secretary Xi Jinping's long-term goal of "doubling the total economic output or per capita income by 2035", the average annual GDP growth rate needs to reach about 4.6%. However, according to the growth target of 5% this year, the average annual compound growth rate from last year to this year is expected to be only about 4%, which is significantly lower than the potential growth rate, and the growth pressure is more prominent. Considering systemic risks such as the Federal Reserve's "higher for longer", intensified geopolitical frictions, and real estate investment stalls, the overall growth situation in 24 years is highly uncertain. The additional issuance of treasury bonds will cost 500 billion yuan this year and next year, which is expected to greatly expand aggregate demand, boost the growth rate of infrastructure investment and fixed asset investment this year and next year, and hedge the downward trend in the growth rate of private investment. Considering that 23 years is approaching the end of the year, most of the corresponding physical workload will be released in 24 years, and the effect of incremental fiscal policy will be mainly reflected in the economic growth rate next year, according to the mainland's 0.5-0.7 fiscal expenditure multiplier, it can roughly leverage GDP to increase by about 0.5 percentage points, which will actually help lay a good foundation for economic recovery in 24 years in advance, promote economic growth to a reasonable level faster this year and next, and promote the realization of the 2035 long-term goal.
In 23 years, the fiscal policy was weak, the monetary policy was active, and the subsequent fiscal/monetary policy is expected to work in tandem. Since the beginning of the year, the RRR has been cut by 50BP and the MLF interest rate has been reduced by 25BP, continuously releasing medium and long-term liquidity to guide the downward trend of entity financing interest rates, and the overall policy combination of weak fiscal / weak currency has been presented. After the issuance of an additional 1,000 billion treasury bonds, it is expected that the fiscal policy stimulus in the fourth quarter is expected to be further expanded, and the fiscal policy in 24 years will also be forward, and the monetary policy will continue to remain loose. The coordination of easy fiscal and easy monetary policies will help stimulate the real demand of the economy, expand the transmission channel from easy money to easy credit, avoid the decline or even failure of monetary policy effect caused by monetary accumulation, and better achieve the effect of stimulating economic growth.
From the perspective of the impact on the market, it is expected that the bond market will remain volatile, which is good for the equity and commodity markets. "Special treasury bonds" has been the supply shock of the bond market since the second half of the year, and the official announcement of "the profit is exhausted" will have a certain effect on the bond market sentiment, but it will also further aggravate the bond market's worries about the good fundamentals next year, and the bond market trend is expected to be more tangled, with a high probability of two-way fluctuations. For the equity and commodity markets, trillions of treasury bonds will directly benefit the equity market infrastructure sector and the black sector of the commodity market, and at the same time, it is also conducive to stabilizing investor confidence, enhancing optimistic expectations for the future, and repairing the overall risk appetite, so as to improve the performance of the equity market from both ends of valuation and performance. There may be a structural rebound in the relevant sectors in the near term.
Specific to the A-share market, the previous additional issuance of treasury bonds has a good effect on the big A, and the stock market may be bottoming out at an accelerated pace. Statistics show that the additional issuance of treasury bonds in the middle of the year since 2000 occurred in August 2000/June 2007/August 2017/March 2020, and the corresponding monthly increases of the Shanghai Composite Index were 7.2%/45.1%/5.2%/27.2% respectively, mainly due to the fiscal policy to stabilize market sentiment and improve the overall valuation level of the market. Combined with the current situation of big A, support policies emerge in an endless stream, economic data has improved across the board, the second quarter or the bottom of earnings, corporate earnings have also bottomed out, and now the main factor dragging down the market is pessimistic expectations that lead to continued capital outflows, suppressing market valuations. At present, the issuance of trillions of treasury bonds may become the key to the reversal of market sentiment, and after the bottom of profits, the bottom of the market may not be far away.
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This article was originally written by "Xingtu Financial Research Institute", and the author is Wu Zewei, a researcher at Xingtu Financial Research Institute