MNI: China Fiscal Stimulus Tap Flows, But Cautiously

China has around two trillion yuan potentially available to add more fiscal stimulus to its monetary easing and shore up the economy including this week's announcements, but analysts expect a cautious and calibrated approach to further fiscal injections that reflect concern about mounting debt levels.

They note that additional issuance of investment project-backed special bonds in the second half of this year could potentially reach as much as CNY1.55 trillion - as Beijing continues to see infrastructure development as the main growth driver this year. This follows the completed issuance in the first half of the CNY3.65 trillion in such bonds originally allocated for 2022.

The national balance of special bonds was CNY20.26 trillion as of June compared with the government-set special debt limit of CNY21.81 trillion, leaving room for up to another CNY1.55 trillion within the ceiling, Chen Xing, chief analyst of Zhongtai Securities, points out in a research note.

On Wednesday, the State Council allocated a fresh tranche of CNY500 billion of special bonds, urging local governments to complete issuance by the end of October. Policymakers, remaining cautious about debt risks, are not yet releasing the full amount under the ceiling at one time so as to emphasize the effectiveness of investment and to save policy ammunition, said Wen Bin, chief economist from China Minsheng Bank.

Around 60% of the remaining headroom is for the eastern provinces, led by Shanghai’s CNY168 billion, said Chen. This is in line with Premier Li Keqiang urging the ‘economic powerhouses’ along the southeast coast to take the lead in stabilizing growth.

Moreover, the State Council on Wednesday added a further CNY300 billion financial instrument that state policy banks can invest in infrastructure projects, on top of the CNY300 billion already announced at the end of June. Together with a CNY800 billion credit line previously approved, funding support from policy banks will gradually kick in in H2.

As required, these should be used to supplement project capital. If to supplement 20% of the capital of each project, this CNY600 billion can leverage CNY3 trillion of funds to drive infrastructure investment, said Wen.

FISCAL GAP

Zhang Yu, chief macro analyst of Huachuang Securities, believes fiscal policy intensity will not slow sharply in H2, despite an estimated CNY3.2 trillion fiscal gap.

In addition to tapping into the remaining special bonds quota, local governments are also required to revitalize unused funds or rearrange expenditure, said Zhang, noting that over CNY1 trillion of unused funds from 2021 are available to be carried over to this year. Certain state-owned enterprises can also submit profits accumulated before 2021, following the central bank’s payment of CNY900 billion in profits to the central government in H1, Zhang added.

The gap between fiscal revenue and expenditure continues to widen amid increased Covid spending, lower tax revenues and larger-than-expected tax refunds. Meanwhile, if the land market continues to cool as real estate turns down, there may be a gap of at least CNY2.5 trillion in 2022, estimated Ming.

From January-to-July, the general public budget revenue totaled CNY12.5 trillion, down 9.2% y/y, while spending totaled CNY14.68 trillion, up 6.4%, Ministry of Finance data showed.

Recent rate cuts by the People’s Bank of China may have kick started a fresh policy easing cycle, as Beijing has made clear its call for steady growth, according to Ming. The government is unlikely to tolerate growth significantly below potential, he said, noting that annualized GDP growth must hit 4.8% until 2035 to achieve China’s long-term goal of doubling real per capita GDP.

Some foreign investment banks have downgraded their 2022 China growth forecasts to around 3% from 3.3% after July data showed the recovery losing momentum. That would be the slowest pace of growth in four decades -- excluding the Covid crisis dip in 2020 -- and not much more than half the government’s 5.5% target.