China owes eight trillion” width=”800″/>Photo: tomasragina – Freepik.com
China plans to issue special long-dated government bonds worth a total of 6 trillion yuan over the next three years to help local governments, particularly in reducing their off-balance sheet debt. The measure, one of the largest efforts by the Chinese central government to date, is intended to promote fiscal stability and stimulate economic growth.
China previously issued similar bonds worth 5 trillion yuan (about 647 billion euros) between 2015 and 2018 – but it is believed that this time the bonds could be issued more quickly to achieve a more immediate effect. In doing so, the government hopes to strengthen the economy at a time when growth is under pressure. These bonds are expected to have maturities of 20, 30 or even 50 years and are not intended to be reported as deficit in the budget, allowing the government flexibility in managing fiscal leverage.
In addition to these new bonds, the Finance Ministry has already announced further relief for local governments: 2 trillion yuan (about 260 billion euros) to relieve debt this year and 1 trillion yuan (about 130 billion euros) to recapitalize large banks. However, these measures must be viewed separately from the current announcement.
Domestic markets in China initially reacted positively to the finance minister’s press conference on Saturday, indicating confidence in the government’s plan, while offshore markets remained more subdued. The Shenzhen SZSE Composite Index rose 3% and the Shanghai SSE Composite Index rose 2% on Monday. In contrast, offshore markets remained subdued, with the Hang Seng Index down 0.75% and the Hang Seng Tech Index down 1.43%. This divergence shows that foreign investors continue skeptical regarding China’s fiscal stability.
Yi Wang, Head of Quantitative Investments at CSOP Asset Management Ltd., commented The situation is as follows: “The market is struggling with expectations of further economic stimulus measures and the economic realities. Investors want to see rapid translation of stimulus measures into better corporate earnings and better macro data, whether on inflation, employment or local government debt. But there is a time gap between these expectations and economic reality.”
While China successfully put out the fire in the 2008 financial crisis with large-scale government intervention by issuing water in the form of long-term bonds, its current policy appears to be akin to a flood by allowing more and more water to flow. In the long term, the continuous injection of financial resources exacerbates the structural problems that were originally created by similar measures, rather than solving them. Beijing is resorting to the same playbook that once worked – but risks creating even deeper imbalances with its current borrowings.
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