27 Oct 2023
The National People’s Congress (NPC) Standing Committee voted to make changes to the central government budget for 2023, allowing for the additional issuance of RMB1trn sovereign bonds to support growth (CCTV and Bloomberg, 24 October).
The proceeds will be directed to local governments, mainly for infrastructure projects, such as post-disaster recovery and reconstruction, and flood control. The committee also voted to approve the front-loading of local government debt from next year’s quota, which should help to address funding shortfalls towards the end of the year and allow for better planning of infrastructure projects in the coming year.
Overall, the additional RMB1trn sovereign bond issuance will raise this year’s budget deficit to 3.8% (from 3.0%), and our calculation implies there will be at least an additional RMB2trn in government bond issuance in Q4, if all approved quotas are issued. An increase in the bond supply will inevitably add pressure to liquidity towards the end of the year, which may raise the chance of another reserve requirement ratio (RRR) cut in the coming months.
Progress is also being made on the local government debt resolution front (see Chart 1). As of 23 October, 22 provinces and cities have issued or plan to issue special refinancing bonds totalling cRMB1trn to repay existing debt (The Paper, 23 October). There have also been changes to allow for more flexible arrangements to support local government debt extensions, with more support coming from state-owned banks. We think a combination of financing solutions to meet liquidity needs, as well as a structural solution are needed. More details will likely be announced at upcoming policy events, such as the Third Plenum and the National Financial Work Conference (dates have not yet been officially released).
Meanwhile, China’s monetary policy stance remains unchanged and still accommodative.Indeed, on 21 October, Pan Gongsheng, Governor of the People’s Bank of China (PBoC),continued to emphasise that macroeconomic policies should be accurately and effectively implemented, financial supervision should be strengthened, and efforts should be made to expand domestic demand, boost confidence, and prevent risks (Gov.cn, 21 October).
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