China is doubling down on its new sovereign bonds, playing a high-stakes game to overcome economic challenges and foster recovery.
Zhu Zhongming, China’s vice finance minister, boldly declared these bonds as the government’s latest fiscal weapon to tackle the aftermath of devastating floods and enhance urban infrastructure for future resilience.
With a staggering 1 trillion yuan ($137 billion) approved by the top parliament body, China is not pulling any punches. The newfound fiscal audacity has pushed China’s budget deficit to around 3.8% of its GDP, a sharp incline from the initially set 3%.
It’s a clear sign; China is not shying away from debt, banking on these bonds to reinvigorate domestic demand and cement economic recovery.
This fiscal bravado is not without its critics, as some argue this debt-fueled stimulus could undercut China’s shift towards a consumer-led economic model.
A Dicey Game with Economic Recovery
China’s economy, the world’s second-largest, showcased unexpected resilience with a robust performance in the third quarter. The nation is seemingly on track to hit its ambitious 5% growth target for 2023.
However, the crisis-riddled property sector continues to cast a long shadow, muddying the waters of future growth prospects. Zhu, in a news conference, portrayed these bonds as the economy’s new lifeline, aiming to fuel domestic demand and fortify economic revival.
Yet, some analysts, including Ting Lu from Nomura, urge caution, highlighting the limited fiscal multiplier effects from water conservancy projects funded by these bonds.
China’s fiscal maneuver has also raised eyebrows about potential misuse of bond funds. Zhu assures that the government will set a reasonable pace for bond issuance and ensure alignment with spending, all while keeping a vigilant eye to prevent misuse.
Even with these assurances, policy advisers are sounding the alarm, calling for a critical evaluation of the government’s debt, which although lower than local governments at 21%, demands scrutiny.
As China embraces its new fiscal strategy, questions linger on the long-term impact of this debt-financed approach. Will this gamble pay off, or will it derail China’s economic trajectory?
The government seems to think the risk is worth taking, with half of the bond funds slated for use in the current year and the remainder in the next.
Analysts from UBS project a potential increase in the government’s budget deficit and special local bond quotas for 2024, coupled with possible reductions in interest rates and bank reserve requirement ratios.
Moreover, the parliament has greenlit a bill permitting local governments to use part of their 2024 local bond quotas ahead of schedule, a move aligned with the directive to exhaust the 3.8 trillion yuan 2023 quota in special local bonds by September for infrastructure projects.
China is placing a colossal bet with these new sovereign bonds, seeking to navigate through its economic hurdles. The stakes are high, and the world is watching.
Will this fiscal audacity pave the way for economic triumph, or will it leave China grappling with the repercussions of a debt-laden strategy? Only time will tell.
