MNI: China Mulls Massive Special Treasury Issuance To Perk GDP

China is expected to issue over CNY1 trillion of Special Treasury Bonds (SBTs) in the third quarter to fill a fiscal gap and to help meet economic and employment targets, policy advisors and market analysts said, calling on the central bank increase liquidity to accommodate the massive debt sale.

Fiscal authorities are suffering a deteriorating balance sheet as income is softened by an economic slowdown and a sluggish property market, while spending to bail out the economy and controlling the pandemic is rising. According to a recent report from Renmin University, the government would see a gap about CNY2.6 trillion as fiscal income may decrease for the whole year, (See: MNI: Warnings As China Interbank Liquidity Feast Bill Near Due).

The gap could undermine fiscal stimulus plans as monetary policy would be restrained by accelerating tightness of foreign central banks and rising overseas inflation.

To cover the extra spending , analysts predict the government may launch CNY1 trillion to CNY2 trillion of STBs in the third quarter if the State Council proposes the measure at the standing committee of National People’s Congress in August.

The STBs are likely to be a necessary move if the country insists on a GDP growth target of around 5.5%, which was reaffirmed by President Xi Jinping last week.

According to Renmin University, macro policy needs to be strong enough to drag up 0.9 to 1.5 percentage points of GDP growth in the second half, based on an estimation that growth would print at 0.8% in Q2, 6.5% in Q3 and 6.3% in Q4.

The Renmin University report has calculated that China’s GDP has lost 4.5 percentage points since 2020 due to the pandemic, which will “severely impact” the pace for long-term economic development.

The Asian Development Bank predicted China average annual GDP growth should reach 4.7% over the coming 15 years if the country wants to become a moderately developed country by 2035, which implies doubling the size of the economy by then.

The report suggested the authorities should not lower the target at present since it is crucial to guide policy efforts and noted the bottom line of GDP growth would be 4.6% in 2022 considering the employment target this year is adding over 11 million new jobs.

SPECIAL TREASURY BONDS

It would be the fourth time in history that China moved to sell STBs. The latest sale was in 2020 when the country launched CNY1 trillion of STBs to counter the slowdown from initial pandemic curbs.

It is believed to be an appropriate option this year as STBs are not listed in official budget ledgers, therefore, it does not push up the deficit-to-GDP ratio which was set at 2.8% in March.

Yang Weimin, vice detector of the Economic Committee of the Chinese People’s Political Consultative Conference, said in a forum that the issue of STBs should be considered to boost consumption.

China Securities predicted the funds raised by STBs would be used to subsidise local governments which are suffering high Covid-19 related costs and have planned to introduce CNY2.5 trillion of tax cuts and rebates.

Wang Yiming, a member of the PBOC monetary policy committee, said the central bank would remain accommodative to coordinate the possible issue of STBs in a bid to further expand credit demand, (See: MNI STATE OF PLAY: PBOC In Wait-And-Watch Mode On Key Rates).

Wang said the foreign environment is also deteriorating considering geopolitical conflicts, global inflation with higher prices of energy and grains. Uncertain Sino-US relations and the policy divergency between the PBOC and Fed are also big factors which all restrain monetary policy room.

Everbright Securities predicted the PBOC may increase open market operations or cut the reserve requirement ratio, so the issuance would not rock liquidity conditions in the interbank market.

BIG CHALLENGE

Advisors and analysts agreed the growth target is a big challenge when the economy faces a more complicated situation for a recovery compared to 2020. Both companies and household sectors are fragile and less confident, and there is reduced policy ammunition for further stimulus after the three-year fight with the pandemic.

Yang said the three major drives in 2020 were information technology services, real estate, and exports. But those areas are losing steam, pointing to a W-shaped recovery rather than a V-shaped one.

The biggest policy headache is employment. Surveyed urban unemployment registered 5.9% last month, higher than the target of 5.5%, while the unemployment rate for people aged 16-24 printed at a record high of 18.4% in May. Whether the government could manage to meet the employment target is a big question mark, Yang noted.