MNI: PBOC To Support Local Govt Debt Sales, Advisors Say

The People’s Bank of China will boost liquidity by measures including possibly cutting reserve requirement ratios or policy rates in order to facilitate increased local government debt issuance while additional stimulus to boost a flagging economy is likely to be announced after this month’s key government meeting at Beidaihe, policy advisors told MNI.

With expectations building for further stimulus following investor disappointment with a lack of concrete moves to the plans to support consumption, private investment and the property market made public following last month’s politburo meeting, officials are also pushing local governments to issue their remaining 2023 quotas for so-called special bonds in the third quarter, and to spend the proceeds before the end of the year.

A total CNY2.48 trillion of local government special bonds were issued in the first seven months of 2023, leaving a further CNY1.32 trillion to sell before the end of September, according to Wind, a Chinese financial data provider.

RESERVE REQUIREMENTS

This increased issuance will require central bank liquidity support, said Zhao Quanhou, director at the Financial Research Center at the Chinese Academy of Fiscal Sciences under the Ministry of Finance, adding that the PBOC is likely to strengthen structural tools and could cut the reserve requirement ratio and policy rates to coordinate with fiscal moves. Fiscal authorities could also increase subsidies for low-income groups, he said, though cash handouts of the sort seen in the West during Covid are unlikely.

PBOC monetary policy department chief Zou Lan told a briefing last Friday that the Bank will deploy RRR cuts, open market operations and the medium-term lending facility alongside targeted tools to maintain adequate liquidity in the banking system.

Zhao noted that fiscal spending will increase in the second half, supporting infrastructure and that third-quarter growth should exceed Q2’s 6.3%. Lower-than-expected fiscal spending over the first half was likely driven by the repayment of some local governments to companies contracted to administer anti-Covid measures, such as testing, he said.

DOWNBEAT INVESTORS

An advisor who asked for anonymity told MNI that recently-announced stimulus plans were not executable. While authorities called for a boost to consumption, they have not provided a plan to increase income, and few cities have implemented pledges to further ease property market controls or are doing so only slowly, the advisor noted.

Fiscal authorities should accelerate the launch of major projects as soon as possible, while the PBOC implements targeted support, he said, though he conceded that the space for broad monetary tools such as rate cuts may be limited.

The economy is in a tougher situation than last November when it reopened following the pandemic, with weak demand hitting both small- and medium-sized companies and traditional industries, he said. Recent deflationary signs indicated China’s balance sheet needs time to repair, he warned.

SUMMER SUMMIT

The secretive annual Beidaihe meeting brings China’s top leaders together for their summer vacation during which they reportedly discuss a range of matters across politics and the economy. It is expected to be held in the middle of this month.

A separate anonymous advisor noted the conclave will publish the meeting’s statement before the end of the month, setting a clearer tone to guide government policies. The top leadership must take action, as challenges are mounting both domestically and abroad, he said.