Authors: Zhong Zhengsheng, Zhang Lu, Chang Yixin (Zhong Zhengsheng is a director of the China Chief Economist Forum and the chief economist of Ping An Securities)
Key takeaways
Matters: On October 12, 2024, the State Council Information Office invited Minister of Finance Lan Foan and others to hold a press conference.
1. Ensure the completion of the annual budget target. "I can responsibly tell you that China's fiscal strength is sufficient, and through comprehensive measures, it can achieve a balance between revenue and expenditure and meet the annual budget target," Minister Lan said. The market's doubts about the completion of the annual budget target lie in the fact that based on the current fiscal revenue growth situation, the annual general public budget revenue will be nearly 1.3 trillion yuan less than the budget at the beginning of the year. There are two ways to achieve a balance between revenue and expenditure and accomplish the goals of the general public budget: First, transfer funds from the budget stabilization and adjustment fund, the budget of government funds, and the budget for the operation of state-owned capital. These three points have been mentioned by the Ministry of Finance this time, and one of them is clear that the local government balance limit of 400 billion yuan will be transferred from the government fund budget to the general public budget in whole or in part after issuance. The second is to expand the scale of the deficit. By the end of 2023, the balance of national bonds will be 830 billion yuan away from the limit, the balance of local general bonds will be 680 billion yuan away from the limit, and the balance of local special bonds will be 750 billion yuan away from the limit. Without adjusting the budget deficit, the target can be achieved by using a total of 800 billion to 900 billion yuan of national bonds or local general bonds. This is only to consider the achievement of the hard general public budget target, and the bigger gap between fiscal revenue and expenditure this year lies in the government fund budget. According to the current growth rate, the annual government fund income gap is nearly 1.5 trillion yuan. Combined with the "central finance still has a large room for borrowing and deficit improvement", the subsequent budget adjustment of the National People's Congress may be a high probability event, and the scale of additional treasury bonds may be in the range of 1.5-2.5 trillion yuan (the government fund income gap is 1.5 trillion + or the balance of 8000-900 billion yuan in previous years is not used).
2. Strengthen support for local governments to resolve government debt risks. This is the biggest highlight of this conference. First, there is still room for the issuance of nearly 300 billion yuan of "special refinancing bonds" that have been arranged during the year. According to the press conference, in 2024, 1.2 trillion yuan of local government bonds have been arranged for chemical bonds, of which the scale of "special refinancing bonds" with a revitalization limit is about 400 billion yuan. According to the statistics of Enterprise Early Warning, as of October 12, the scale of "special new special bonds" issued during the year was about 821 billion yuan, basically reaching the predetermined target; The scale of "special refinancing bonds" issued is about 113.3 billion yuan, and the remaining amount to be issued during the year is less than 300 billion yuan. Second, in order to support debt resolution, the local government debt limit will be increased at one time. Combined with the stock of local government implicit debt and the scale of pre-existing debt, we expect that the upper limit of the one-time increase in the local government debt limit will be about 10 trillion yuan, lower than the 12.2 trillion yuan in 2015-2018. As more than half of the process of resolving local government stock debt will be more than half by the end of 2023, the balance of implicit debt that needs to be resolved from 2024 to the end of 2027 is expected to be 10-15 trillion yuan. As far as the lower limit is concerned, we expect a one-off adjustment of the local government debt limit to be no less than 5 trillion yuan. This is mainly based on the fact that the local government debt limit that has been arranged since July 2023 for chemical debt has reached 3.4 trillion yuan, and the statements of "relatively large-scale" and "the largest support for chemical debt issued in recent years" at the press conference of the Ministry of Finance imply that there is room for afterburner compared with the previous one. Third, "taking 2023 as an example, the expenditure of the "three guarantees" at the grassroots level will account for about 50% of the available financial resources, and if other rigid expenditures are added, it will account for about 80% of the available financial resources", which has occupied more local energy. This time, "after greatly reducing the pressure of localized debt, more resources can be freed up to develop the economy".
3. Support and promote the real estate market to stop falling and stabilize. Minister Lan pointed out that "the superimposed use of local government special bonds, special funds, tax policies and other tools to support and promote the real estate market to stop falling and stabilize". The most important of these is to allow special bonds to be used to acquire the stock of commercial housing as affordable housing in various places. One of the major pain points of the previous commercial housing collection and storage was that it was difficult to balance the cost and benefit of the project. On September 24, the central bank announced that it would increase the proportion of the People's Bank of China's contribution in the 300 billion yuan affordable housing relending policy from the original 60% to 100%, thereby reducing the cost of funds provided by commercial banks to equal to the relending interest rate of 1.75%, and if the interest rate difference of 1.5% is added, the project cost will be about 3.25%. After allowing special bonds to provide funds this time, considering that the average issuance rate of local special bonds from January to August is 2.4%, the comprehensive cost of the project may be pulled down to less than 3%, which is closer to the rental return rate of about 2%. The feasibility of the commercial housing purchase and storage policy will be improved, which can effectively promote the stabilization of housing prices. Of course, in addition to the price of funds, the scale of funds is also very important, and we estimate that 2 trillion yuan may be needed to realize the effective inventory removal of real estate acquisition and storage, which needs to be considered in the local special bond quota.
4. In addition to the above-mentioned measures, there are two other important measures worth noting at the press conference of the Ministry of Finance. First, we will issue special treasury bonds to support large state-owned commercial banks in replenishing their core Tier 1 capital. This is a policy that combines fiscal and monetary policy, and its intention is to enhance the risk resistance of large state-owned banks, enhance their ability to provide credit, and also help give full play to the important role of large state-owned banks in resolving local government debts. In the case of a significant narrowing of the net interest margin of commercial banks, the replenishment of commercial banks' capital has also indirectly broadened the space for monetary policy to further cut interest rates. The case for reference is that since 2020, the mainland has arranged a total of 550 billion yuan of special bonds for the capital replenishment of small and medium-sized banks; In 1998, the mainland issued 270 billion yuan of special treasury bonds, and the funds raised were used to supplement the capital of major state-owned banks. The second is to increase support and guarantee for key groups. In terms of financial subsidies to promote consumption, the Ministry of Finance still focuses on key groups such as the needy, students, and the elderly, and the fiscal sector needs to make greater strides in promoting consumption.
On October 12, 2024, the State Council Information Office invited Minister of Finance Lan Foan and others to introduce the relevant situation of "increasing the countercyclical adjustment of fiscal policy and promoting high-quality economic development". At the meeting, the Ministry of Finance introduced a package of incremental policy measures that will be launched in the near future, injecting strong confidence into the current steady growth of China's economy.
One
Make sure you meet your budget goals for the year
Minister Lan pointed out that "the growth rate of general public budget revenue is expected to be lower than expected", and "I can responsibly tell you here that China's fiscal resilience is sufficient, and through comprehensive measures, it can achieve a balance between revenue and expenditure and achieve the annual budget target."
The market's doubts about the completion of the annual budget target are that the growth rate of national public finance revenue from January to August was only -2.6%, and according to this growth rate, the annual general public budget revenue will be 21.1 trillion yuan, nearly 1.3 trillion yuan less than the general public budget revenue at the beginning of the year. There are two ways to achieve the goal of balancing revenue and expenditure and meeting the general public budget:
First, funds will be transferred from the budget stabilization and adjustment fund (this time "to guide local governments to use the budget stabilization and adjustment fund and other stock funds in accordance with laws and regulations"), the government fund budget (this time "400 billion yuan has been arranged from the local government debt balance limit"), and the state-owned capital operating budget (this time "encourage qualified localities to revitalize idle assets and strengthen the management of state-owned capital gains"). These three points have been mentioned by the Ministry of Finance this time, and one of them is clear that the local government balance limit of 400 billion yuan will be transferred from the government fund budget to the general public budget in whole or in part after issuance.
Second, according to the "Report of the State Council on the Management of Government Debt in 2023", at the end of 2023, the balance of national bonds will be 830 billion yuan away from the limit, the balance of local general bonds will be 680 billion yuan away from the limit, and the balance of local special bonds will be 750 billion yuan away from the limit. This time, it was announced that 400 billion yuan of local special bonds will be used, and a total of 800 billion to 900 billion yuan of national bonds or local general bonds will be used to achieve the goal without adjusting the budget deficit.
This is only considering the realization of the hard general public budget target, this year's fiscal revenue and expenditure of the bigger gap lies in the government fund budget: from January to August, the growth rate of the national government fund revenue is only -21.1%, extrapolated to the whole year, the annual government fund income will be nearly 1.5 trillion less than the government fund budget revenue at the beginning of the year. According to the current growth rate, the annual government fund expenditure will be nearly 3.5 trillion less than the budget at the beginning of the year, considering that "a total of 2.3 trillion yuan of special bond funds can be arranged for use in the next three months", which also means a budget gap of 1.2 trillion yuan. Therefore, combined with the perspective that "the central government still has a large room for borrowing and deficit improvement", the subsequent budget adjustment of the National People's Congress may be a high probability event, and the scale of additional issuance of national bonds/local bonds may be in the range of 1.5-2.5 trillion yuan (the government fund income gap of 1.5 trillion + may not use the balance of 8000-900 billion yuan in previous years).
Two
Strengthen support for local governments to resolve government debt risks
This is the biggest highlight of this conference.
First, there is still room for the issuance of nearly 300 billion yuan of "special refinancing bonds" that have been arranged during the year. Judging from the statement of the press conference, in 2024, the local government bond funds that have been arranged for chemical bonds will reach 1.2 trillion yuan, of which the scale of "special refinancing bonds" with a revitalization limit will be about 400 billion yuan. "Since 2024, after fulfilling relevant procedures, the Ministry of Finance has arranged a debt limit of 1.2 trillion yuan to support local governments to resolve existing hidden debts and digest the government's arrears to enterprises." "This year, a debt limit of 400 billion yuan has been issued to local governments to supplement comprehensive financial resources." According to the statistics of Enterprise Early Warning, as of October 12, the scale of "special new special bonds" issued during the year was about 821 billion yuan, basically reaching the predetermined target; The scale of "special refinancing bonds" issued is about 113.3 billion yuan, and the remaining amount to be issued during the year is less than 300 billion yuan.
Second, in order to support debt resolution, the local government debt limit will be increased at one time. We expect the overall scale to reach 5 trillion to 10 trillion yuan, and the increase in the debt limit of local government bonds may be used to issue replacement bonds. "It is proposed to increase the debt limit of a larger scale at one time to replace the stock of implicit debts of local governments, increase efforts to support local governments to resolve debt risks, and relevant policies will be explained in detail to the society after the implementation of legal procedures. It should be emphasized that this upcoming policy is the most powerful measure to support debt in recent years."
- First of all, looking back at the scale of several rounds of debt after the implementation of the new Budget Law, in the three rounds of 2015-2018, 2019, and 2020-2022, the replacement amount of local implicit debt was 12.2 trillion yuan, 157.9 billion yuan, and 1,117 billion yuan, respectively. Since July 2023, the Ministry of Finance has arranged a total of 3.4 trillion yuan of local government debt limits for debt resolution ("on top of the local government debt limit of more than 2.2 trillion yuan in 2023, the central government will arrange another 1.2 trillion yuan in 2024 to support local governments, especially high-risk areas, to resolve existing debt risks and clear arrears of enterprises").
- Second, the resolution of local government implicit debts has achieved certain results. "As of the end of 2023, the balance of implicit debt included in the government debt information platform nationwide has decreased by 50% compared with the 2018 map." In August 2018, Circular No. 27 "Opinions on Preventing and Resolving the Risk of Hidden Debt of Local Governments" requires local governments to resolve hidden debts within 5-10 years. Referring to the compilation of the book "Coordinating Development and Security: A Study of Chinese Government Debt", we estimate that the balance of the national implicit debt in 2018 will be 20-30 trillion yuan. For example, the IMF estimated that the scale of local government implicit debt in 2018 was 30.29 trillion yuan, the scale of national implicit debt in 2018 estimated by S&P Ratings was 30-40 trillion yuan, the scale of local government implicit debt in 2018 estimated by Mao Zhenhua and others was 21-30.5 trillion yuan, and the scale of local government implicit debt at the end of 2017 was estimated to be about 30 trillion yuan by the National Finance and Development Laboratory of the Chinese Academy of Social Sciences and the Institute of Finance and Taxation of Tsinghua University. Li Yang, et al., and Zhang Xiaojing estimated that the scale of the country's implicit debt at the end of 2018 was also about 30 trillion yuan.
- Finally, combined with the stock and scale of local government implicit debt in the previous period, we expect that the upper limit of the one-time adjustment of local government debt limit will be around 10 trillion yuan, down from 12.2 trillion yuan in 2015-2018. As more than half of the process of resolving local government stock debt will be more than half by the end of 2023, the balance of implicit debt that needs to be resolved from 2024 to the end of 2027 is expected to be 10-15 trillion yuan. As far as the lower limit is concerned, we expect a one-off adjustment of the local government debt limit to be no less than 5 trillion yuan. This is mainly based on the fact that the local government debt limit that has been arranged since July 2023 for chemical debt has reached 3.4 trillion yuan, and the statements of "relatively large-scale" and "the largest support for chemical debt issued in recent years" at the press conference of the Ministry of Finance imply that there is room for afterburner compared with the previous one.
Third, how to understand the relationship between local government debt resolution and stable growth? Since 2023, local governments have continued to face revenue reductions, and the completion of the "three guarantees" at the grassroots level and rigid expenditures have occupied more energy. According to the press conference of the Ministry of Finance, "taking 2023 as an example, the expenditure of the "three guarantees" at the grassroots level will account for about 50% of the available financial resources, and if other rigid expenditures are added, it will account for about 80% of the available financial resources." At the same time, the resolution of implicit debts has accelerated, once again occupying limited local financial resources, thus restricting the space for local fiscal support for steady growth. The press conference said that "this is undoubtedly a timely policy rain, which greatly reduces the pressure on localized debt, can free up more resources to develop the economy, and boosts the confidence of business entities."
Three
Support and promote the real estate market to stop falling and stabilize
Minister Lan pointed out that "the superimposed use of local government special bonds, special funds, tax policies and other tools to support and promote the real estate market to stop falling and stabilize". A certain level of financial support will be a key part of the real estate market's decline and stabilization.
The most important of these is to allow special bonds to be used to acquire the stock of commercial housing as affordable housing in various places. One of the major pain points of the previous commercial housing collection and storage was that it was difficult to balance the cost and benefit of the project. On September 24, the central bank announced that it would increase the proportion of the People's Bank of China's contribution in the 300 billion yuan affordable housing relending policy from the original 60% to 100%, thereby reducing the cost of funds provided by commercial banks to equal to the relending interest rate of 1.75%, and if the interest rate difference of 1.5% is added, the project cost will be about 3.25%. After allowing special bonds to provide funds this time, considering that the average issuance rate of local special bonds from January to August is 2.4%, the comprehensive cost of the project may be pulled down to less than 3%, which is closer to the rental return rate of about 2%. It is expected that the feasibility of the commercial housing purchase and storage policy will be improved, which can effectively promote the housing price to stop falling and stabilize. Of course, in addition to the price of funds, the size of funds is also very important, we estimated in the previous report "Three Considerations for the New Real Estate Deal" that real estate acquisition and storage to achieve effective inventory removal or need 2 trillion funds, which needs to be considered in the local special debt quota.
In addition, this finance also proposed: 1) optimize and adjust the subsidy funds for affordable housing projects, appropriately reduce the scale of new construction, and support local governments to raise more affordable housing by digesting the stock of housing. The Ministry of Finance pointed out that "in the past three years, the central government has arranged a total of 212.4 billion yuan of subsidy funds for affordable housing projects", but it is also a necessary and appropriate direction of adjustment. 2) In addition to the phased individual income tax refund policy of "selling the old and buying the new" for housing purchases, it will also "pay close attention to the study and clarify the value-added tax and land value-added tax policies that are linked to the cancellation of ordinary residential and non-ordinary residential standards", so as to support the real estate market to stop falling and stabilize from the tax level.
Four
Support large state-owned banks to replenish capital and focus on key groups
In addition to the above-mentioned measures, there are two other important measures worth noting at the Ministry of Finance's press conference.
First, we will issue special treasury bonds to support large state-owned commercial banks in replenishing their core Tier 1 capital. This is a policy that combines fiscal and monetary policy, and its intention is to enhance the risk resistance of large state-owned banks, enhance their ability to provide credit, and also help give full play to the important role of large state-owned banks in resolving local government debts. In the case of a significant narrowing of the net interest margin of commercial banks, the replenishment of commercial banks' capital has also indirectly broadened the space for monetary policy to further cut interest rates. At the press conference, the Ministry of Finance emphasized the idea of "overall promotion, phased and batched, one line and one policy", and did not support the scale by name. The case for reference is that since 2020, the mainland has arranged a total of 550 billion yuan of special bonds for the capital replenishment of small and medium-sized banks (based on the data of the Central Bank's "China Financial Stability Report (2021)" and the Ministry of Finance's "Report on the Implementation of China's Fiscal Policy in the First Half of 2022", the new special bonds arranged by the Ministry of Finance in 2020, 2021 and 2022 to support the capital replenishment of small and medium-sized banks are 200 billion yuan, 150 billion yuan and 200 billion yuan respectively. The current unused quota can be carried forward to the next year); In 1998, the mainland issued 270 billion yuan of special treasury bonds, and the funds raised were used to supplement the capital of major state-owned banks.
Second, we need to increase support and guarantee for key groups. In terms of financial subsidies to promote consumption that the market is concerned about, the Ministry of Finance still focuses on the key groups of the needy, students, and the elderly, including: "Before this year's National Day, a one-time living allowance was also issued to people living in difficulty such as extremely poor people and orphans"; "The next step will be to increase the number of students in need"; "In 2024, the minimum standard of basic pension for urban and rural residents will be further raised, which is the largest increase in the previous standard increase." Fiscal efforts need to be made to promote consumption.
Risk Warning: The effect of the steady growth policy is less than expected, the overseas economic and financial risks exceed expectations, and the international geopolitical situation is uncertain.
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