China will use ultra-long bonds for consumption as retail sales decline

SHANGHAI – China on Thursday announced its most targeted measures yet to boost consumption, which has remained subdued since the Covid-19 pandemic.

Authorities announced they would allocate 300 billion Chinese yuan ($41.5 billion) in ultra-long special government bonds to expand an existing equipment trade-in and upgrade policy. The document was jointly published by the National Development and Reform Commission – China’s economic planning agency – and the Ministry of Finance.

“There have never been such specific measures” aimed at consumption, Zong Liang, chief research officer at the Bank of China, said in a telephone interview on Thursday, according to a CNBC translation of his remarks in Mandarin.

He noted how the new policy links Beijing’s ultra-long bond program announced in March to consumption.

“This is a very important measure for the implementation of the Third Plenum,” Zong said. He was referring to a high-level meeting of Chinese leaders last week, which comes only twice a decade and usually sets the tone for economic policy.

The latest Third Plenum concluded with the publication of a number of key guidance documents over the weekend, which reaffirmed Beijing’s long-term interests in strengthening advanced technology. The official communiqué focused on ‘deepening reforms’. It also said China would work to achieve its full-year national targets, but disappointed many analysts by not signaling major policy changes.

Policymakers have taken action this past week. The People’s Bank of China unexpectedly cut rates on Monday, amid other changes, and cut rates on medium-term loans on Thursday.

The National Development and Reform Commission then announced the comprehensive consumption support policy on Thursday.

‘This step is an action that kills three birds with one stone: stimulating consumption, absorbing industrial production and… [solidifying] economic growth to reach the promised 5% target,” said Bruce Pang, chief economist and head of research for Greater China at JLL.

At least the policy doubles subsidies for the purchase of new energy and traditional fuel vehicles up to 20,000 yuan and 15,000 yuan per car, respectively.

The measures will subsidize a range of equipment upgrades, from equipment used in agriculture to elevators for apartments. Officials noted Thursday that about 800,000 elevators in China have been in use for more than 15 years, and 170,000 of them have been in use for more than 20 years.

The policy also provided specific subsidies for home renovations and consumer purchases of refrigerators, washing machines, televisions, computers, air conditioners and other home appliances. According to the document, each consumer could receive subsidies of up to 2,000 yuan for one purchase in each category.

In allocating the roughly 300 billion yuan in ultra-long-term bonds that the local government could use for the subsidies, the policy noted that the central government would withdraw any unused money by the end of 2024.

“This means they emphasize that the money must be spent,” Zong said. He noted that the 300 billion yuan designation also reflects a “new way of thinking” that can have a large-scale impact.

The measures come at a time when Chinese consumers are reluctant to spend, partly due to uncertainty about future incomes and the slump in the real estate sector.

Chinese retail sales grew 2% year-on-year in June, which Zong said was “not ideal.”

Concerns about China’s lackluster consumer spending have recently gained traction in a country where public discourse can be tightly controlled.

James Liang, co-founder of Trip.com, this month called on Beijing to issue consumption vouchers Newsletter “The East has been read”. which quoted Liang’s post on Chinese social media platform WeChat. The same publication pointed out that Li Yang, head of the National Institution for Finance & Development (NFID), highlighted declining Chinese consumption in late May.

China reported retail sales growth of 3.7% in the first half of the year, slower than in the first half of the year 8.2% pace recorded in the year-ago period.

That means “the pressure to boost consumption is quite strong,” Liu Xiaoguang, a professor at the Academy of Development and Strategy of China’s Renmin University, said in a presentation to reporters on Thursday, according to a copy seen by CNBC. This is evident from a CNBC translation from Chinese.

Liu noted that the housing market has not yet reached a clear turning point, and it would take some time for this turning point to be consolidated.

But he said that with China’s recently announced plans for “deepening reforms” the economy could grow 5.3% this year, compared with 5.1% without such measures.