Goldman Sachs On China Fiscal Policy

The US bank weighs in on China's fiscal backdrop, noting how challenging this year has been from a revenue standpoint. The bank expects bond issuance to accelerate between now and the end of the year.

Goldman Sachs: "Despite high market expectations for proactive fiscal support early this year, fiscal challenges appear more severe and persistent than previous years – especially from falling tax and land sales revenue – while the pace of government bond issuance was much slower than normal years during January-July. As a result, our proprietary augmented fiscal deficit (AFD) metric narrowed so far this year compared to its 2023 level, implying fiscal policy has been a growth drag, rather than a boost.

Behind the slow pace of government bond issuance, we view the carryover fiscal deposits and the difficulties in finding sufficient projects with decent return profiles as transitory factors. Strong exports and the 5.3% yoy real GDP growth in Q1 probably also reduced the urgency for policymakers to ease the fiscal stance earlier this year. Moreover, adverse weather conditions during this summer have temporarily constrained some construction activity. While these transitory factors have eased, some durable constraints -- including LGFV deleveraging and the strengthened anti-corruption investigations -- may continue to weigh on the pace and magnitude of fiscal easing.

We believe more fiscal easing is necessary to help secure the “around 5%” full-year growth target, and expect AFD to widen meaningfully in H2 vs. H1, reflecting a backloaded fiscal easing this year. One of the low-hanging fruit is to accelerate government bond issuance and proceeds spending. We note that of the RMB9tn full-year government bond issuance quota approved in March, only 46% were issued by end-July, well below normal years and implying an RMB4.8tn quota available for use for August-December.

For the 2024 fiscal outlook, we revise down our projections for on-budget fiscal revenue, land sales revenue and PSL, and now expect AFD to widen slightly by 0.3pp of GDP to 11.5% in 2024 (vs. our previous projection of 11.9%). On investment, we expect headline FAI growth to increase modestly to +4.5% yoy in 2024 (vs. our previous projection of +5% yoy) from +3% yoy in 2023. Adjusting for price factors, we maintain our forecast for gross fixed capital formation growth at +4.5% in 2024 (vs. +4.9% in 2023), implying no change to our 2024 GDP growth forecast."