MNI: High Local Targets Hint At Further China Gov. Leverage

Chinese local governments have set lofty GDP targets they aim to meet with increased investment and consumption, but tighter scrutiny over debt raising and falling fiscal revenue will restrain their capacity and could lead the central government to issue more bonds, policy advisors told MNI.

The 31 provincial-level governments across China unveiled their 2024 targets at the annual local Two Sessions meetings last week, setting their weighted average GDP target at 5.4% y/y, compared to 2023’s actual 5.2% print. Shanghai and Beijing, whose targets closely track the national level, set “around 5%”.

Liu Xinghua, a distinguished professor at Tongji University and director at the Center for Chinese Economic Studies at the China Institute for Innovation and Development Strategy, said reaching 5.4% represented a difficult goal due to 2023's high comparison base. He predicted the national meetings, set to start in March, would set an “about 5%” target.

The economy will need to achieve circa 5% growth to meet the 14th five-year plan’s 2021-2025 target, prevent financial risk, increase employment, stabilise sentiment and ensure “high-quality development,” the professor said. China can reach a growth rate of around 5% in 2024 should authorities make efforts to stabilise exports, stimulate consumption and expand effective investment, he added. (See MNI: China Stimulus To Keep 2024 Growth Over 5%, Advisors Say)

INVESTMENT FOCUS

The provinces also set a 5.9% weighted-average target for fixed-asset investment (FAI), 2.5 percentage points lower than 2023’s level, but higher than 2023's national 3% print.

Zhao Quanhou, director at the Financial Research Center of the Chinese Academy of Fiscal Sciences under the Ministry of Finance, told MNI the restrictions on new local-government debt – particularly for the 12 most-indebted provinces – had driven the lower target.

Provinces and cities that have reported difficulty repaying debt reduced their FAI targets. Tianjin for instance, wants to maintain growth compared to its 3% 2023 target, while Guizhou set a 4.5% goal.

Zhao said the central government had asked local governments to dispose all implicit debt by 2028 via debt swaps or asset sales to pay down liabilities, a challenging task. (See MNI: China To Pursue Moderate Policy Support In 2024)

Zong Liang, chief researcher at the Bank of China, said the lower target had illustrated the local governments’ hesitation to increase debt, particularly when the weak property sector had reduced fiscal income and dragged down investment. Debt, however, must expand at an appropriate pace to support the economy, he added.

The debt quota for those local governments with comparatively healthier balance sheets will remain high, Zhao said, pointing to the local government special bond plans to issue as much as CNY4 trillion in 2024 compared to 2023’s CNY3.65 trillion. In addition, the central government may issue CNY1 trillion in special treasuries later this year, he predicted.

Advisors also pointed to the two sessions reports which mentioned the “three major projects” affordable housing, urban renovation and infrastructure programme, noting it would help support the economy.

Zhao noted local governments may buy into some real-estate projects to develop more affordable houses and promote sustainable city growth, which will boost property, however, the investment will likely stabilise the sector rather than lead to a significant rebound.

CONSUMPTION

The provinces also set a 6.5% y/y target for weighted average retail sales, 1.3 pp lower than 2023’s goal and the actual 7.2% growth.

Liu said the high comparison base had made a rapid rise in retail sales impossible this year, noting consumption contributed 82.5% of GDP growth in 2023.

In the short term, authorities should support bulk consumption, such as new energy vehicles and electronic products. Large-scale equipment upgrades and trade-ins for consumer goods will also help bolster consumption, Liu suggested.

Zhao said, however, local government consumption will fall as they focus on debt repayment.

FISCAL REVENUE

The provinces set the weighted average fiscal revenue target at 4.4%, compared to 2023’s 6.4% growth, and lower than its 5.4% GDP target.

Zhao attributed the lower-than-GDP fiscal income to the sluggish producer price index, as this would largely impact tax revenue. He said the lower target would help reduce operation costs and the social burden.