MNI INTERVIEW: China To Extend Debt, Reform Local Gov Tax

China will increase off-the-book special government debt issuance and extend its maturity to raise funds for medium- and long-term growth initiatives, while considering additional revenue sources for local governments to ease their fiscal challenges, a prominent policy advisor told MNI in an interview.

Beijing unveiled its 2024 fiscal expansion plan on Tuesday, revealing CNY1 trillion worth of ultra-long special treasury bonds to address funding shortages for major projects in key areas. (See MNI: China Seen Sustaining Fiscal Stimulus As Total Deficit Up)

Jia Kang, former director at the China Academy of New Supply Side Economics, told MNI authorities will likely structure the “ultra-long” special treasuries with 30-year maturities or longer to target long-term projects that benefit structural reform, balanced growth and state security, such as urbanisation, and rural-revitalisation schemes among others.

The Ministry of Finance will grant more special bonds in coming years as necessary, he said, noting Premier Li Qiang’s work report this week stated issuance would begin “this year and over each of the next several years.”

Jia is former director of the Institute of Fiscal Science at the Ministry of Finance and previous member of the Chinese People’s Political Consultative Conference.

Issuers could also extend the maturity of local-government special bonds (LGSB) to over 30 years to ensure repayment of some projects that have provided poor returns, Jia added. China will issue CNY3.9 trillion of LGSBs this year. The longest maturity presently is 10 years.

LGSBs will continue to play an important role in fiscal expansion despite repayment concerns, he added. Authorities had designed the bonds to pay down with profits from funded projects, however, low returns have increased concern among investors.

GOVERNMENT BORROWING

Considerable room exists for the country’s governments, particularly the central body, to extend their balance sheets, Jia noted.

The debt ratio of China’s public sector remains much lower than the global average, Jia said, pointing to China’s 56% on-the-book government debt/GDP ratio at the end of 2023.

Governments will need to borrow more to push the economy above the 5% GDP growth target, which should represent the baseline of economic improvement over the next two years, Jia added, estimating the country will set 2025’s goal at about the same level.

Beijing can achieve its GDP aim if it pushes industrialisation and urbanisation further, however, authorities must implement the measures effectively, he continued.

FISCAL AND TAX REFORM

The government’s work report revealed Beijing plans to launch a fresh round of fiscal and tax reform.

Jia said the changes will prioritise relationships between the different levels of government, while a decentralised tax system in provinces and regions below the provincial level should be implemented.

China needs to introduce new tax sources to help address local governments’ funding shortage such as real-estate and resources levies, he suggested. A real-estate tax on residential properties could provide “significant and stable" income in line with the direction of the reform, however, its launch will be delayed considering the property market's volatility and economic headwinds, he said.

A tax on the use of natural resources, such as minerals, water and forests, could help governments in the middle and western regions, he argued.

MONETARY EASING

Monetary policy will continue to remain flexible to aid the economic recovery, the economist said, noting authorities could ease policy rates and the reserve requirement ratio should the economy continue to underperform. (See MNI: China Feb PMI To Remain Contractionary, More Rate Cut Seen)

The People’s Bank of China must also now consider the property sector within its mandate, Jia added, pointing to the increased credit supports to developers. The sector had bottomed due to these policy efforts, but it will remain weak and the recovery will take time, he predicted.