Put the country a little more debt to stimulate activity. This has been the Chinese mantra for the past few weeks. As the new finance minister, Lan Foan, was appointed on 24 October in a major cabinet reshuffle, Beijing announced its intention to issue more sovereign bonds.
On Sunday, Lan Foan said China would speed up the new Treasury bond issuance. In "a complex domestic and international situation", the Ministry of Finance will focus on the debt risk of local governments and try to better leverage the new bonds to stimulate the economy. He will also work to improve the effectiveness of fiscal policy, reports the state-run Xinhua news agency.
Consolidating the recovery
A 61-year-old technocrat with little experience in central government, Lan Foan took office in a delicate context. President Xi Jinping hopes to boost domestic consumption and consolidate the recovery in the world's second-largest economy, which has been penalized for months by a slow post-Covid recovery.
At the end of October, his government issued proactive signals on the budget deficit and public debt. Additional sovereign bond issuances for 1000 trillion yuan, about 130 billion euros, were announced. The funds are to be allocated to programmes to rebuild the affected areas or to prevent flooding.
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"It is rare for central government plans to be revised outside of the usual budget cycle. This signals a concern about near-term growth," analysts at Capital Economics said at the time. "The Chinese authorities needed to pay more attention to the growing debt at the subnational level and in local financing vehicles. They should strive to reduce the country's long-standing dependence on real estate," Vitor Gaspar, the IMF's director for fiscal affairs, said in mid-October in Marrakech.
An official meeting on the country's finances was held on October 30 and 31, reports Chinese media. But between the risks associated with local government debt and the worsening real estate crisis and the desire to revive economic activity, the Chinese authorities sometimes seem to be swerving.
Relaxed lending rules
Beijing has allowed some local governments to issue bonds in advance expected in 2024 in order to meet certain needs, the new finance minister said on Sunday.
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At the same time, to allow the real estate sector, which contributes up to 15% of GDP, to participate in the recovery of the economy, the financial regulator is reportedly relaxing the conditions for granting loans. The National Financial Regulatory Administration has reportedly reduced its requirements, including on banks' exposure to mortgages.
In the third quarter, China's economy fared better than analysts expected. As a result, the government's 5% growth target for the full year could be met. But headwinds remain, between the housing crisis and the reluctance of private companies to spend in a context of low confidence. Several economists therefore expect a sharper slowdown in activity in 2024 than in 2023.