China signals more support for struggling local governments

Workers assemble mini excavators at a heavy machinery factory in Suzhou, east China’s Jiangsu Province, October 23, 2023.

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BEIJING – China took steps on Tuesday to ease financing conditions for local governments that are at the heart of recent economic difficulties.

The central government said it has formalized a process that will allow local governments to borrow for the coming year – starting in the previous fourth quarter, an announcement said Publication by state media.

The State Council, China’s top executive body, will predetermine the amount a local government can borrow in advance, the report said. The framework will apply for four years until the end of 2027.

According to state media, the measure was passed at a meeting of the Standing Committee of the National People’s Congress.

The move helps stabilize fiscal policy, said Xu Hongcai, deputy director of the Economics Policy Commission of the China Association of Policy Science.

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“Right now, the growth drivers are not enough,” he said in a phone interview in Mandarin that was translated by CNBC. “Although it is not difficult to achieve the growth target of around 5% this year, the economy is under great pressure next year.”

Earlier this month, the International Monetary Fund cut its growth forecast for China to 5% this year and 4.2% next year.

The IMF cited “weaknesses” in China’s real estate sector and pressure on “debt repayments, home sales and investments.”

China reported last week that gross domestic product grew 4.9% in the third quarter, beating expectations and confirming forecasts for full-year growth of about 5% or more.

Chinese authorities also announced Tuesday the issuance of 1 trillion yuan ($137 billion) in government bonds for natural disaster relief, according to state media. Xinhua, the official state news agency, also pointed this out The deficit would rise from 3% to 3.8%.

“It came as a surprise to the market,” Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, said in a note. “China rarely revises[s] his budget.”

“I see this policy as another step in the right direction – China should make its fiscal policy more supportive in the face of deflationary pressures in the economy. Some of the funds raised will be used next year, helping to improve growth prospects beyond the fourth quarter.”

“Additional political support and more ammunition”

Earlier on Tuesday, This was reported by Bloomberg, citing sources, Chinese President Xi Jinping visited the People’s Bank of China’s top leadership for the first time since taking office. CNBC could not independently confirm the report.

Chinese stock futures rose across the board, with Hong Kong-traded stock futures rising about 2.5% or more on Tuesday evening, according to data from Wind Information.

Among the major personnel changes in the government announced on Tuesday, Chinese state media said Lan Fo’an would replace Liu Kun as finance minister.

“The higher debt ratio and ad hoc issuance of additional debt by the central government could provide additional policy support and more ammunition for a stronger and faster recovery, offsetting macroeconomic headwinds and uncertainties,” said chief economist Bruce Pang, head of research for Greater China at JLL .

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