China signals more support for struggling local governments


Workers assemble mini excavators in a factory of heavy machinery in Suzhou in east China’s Jiangsu province on Oct. 23, 2023.
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BEIJING — China on Tuesday took steps toward easing financing conditions for local governments, which have been at the crux of recent economic difficulties.

The central government said it formalized a process allowing local governments to borrow funds for the year ahead — starting in the preceding fourth quarter, according to an announcement published by state media.

The State Council, China’s top executive body, would determine the amount a local government could borrow ahead of time, the report said, noting the framework would last for four years, through to the end of 2027.

The measure was adopted at a meeting of the National People’s Congress Standing Committee, according to state media.

The move helps stabilize fiscal policy, said Xu Hongcai, deputy director of the Economics Policy Commission at the China Association of Policy Science.

“Right now economic growth drivers are still insufficient,” he said in a Mandarin-language phone interview, translated by CNBC. “Although this year it’s not hard to achieve the growth target of around 5%, there is great pressure on the economy next year.”

Earlier this month, the International Monetary Fund lowered its growth forecast for China to 5% this year and 4.2% next year.

The IMF cited “weaknesses” in China’s real estate sector and pressure on “debt repayments, home sales, and investment.”

China reported last week that third-quarter gross domestic product grew by 4.9%, beating expectations and bolstering forecasts for full-year growth of around 5% or more.

On Tuesday, Chinese authorities also announced the issuance of 1 trillion yuan ($137 billion) in government bonds for natural disaster relief, according to state media. Xinhua, the official state news agency, also pointed out the deficit would increase to 3.8% from 3%.

“It came to the market as a surprise,” Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, said in a note. “China rarely revise[s] its budget.”

“I take this policy as another step in the right direction – China should make its fiscal policy more supportive, given the deflationary pressure in the economy. Part of the funds raised will be utilized next year, hence this helps to boost growth outlook beyond Q4.” 

‘Extra policy support and more ammo’

Earlier on Tuesday, Bloomberg reported, citing sources, that Chinese President Xi Jinping made his first known visit to the People’s Bank of China since taking the top leadership role. CNBC was not able to independently confirm the report.

Futures for China stocks were up across the board, with that of Hong Kong-traded stocks up by about 2.5% or more as of Tuesday evening, according to Wind Information data.

Among major government personnel changes announced Tuesday, Chinese state media said Lan Fo’an would replace Liu Kun as Minister of Finance.

“The higher debt-to-GDP ratio and ad hoc issuance of additional debt from the central government could provide extra policy support and more ammo to re-engineer a stronger and faster recovery, offsetting macro headwinds and uncertainties,” said Bruce Pang, chief economist and head of research for Greater China at JLL.

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