The Chinese Ministry of Finance is tackling debt problems rather than economic challenges

BEIJING – The Chinese Finance Ministry’s press conference last weekend underscored the country’s focus on tackling local governments’ debt problems, rather than the stimulus that markets have been waiting for.

In his opening speech on Saturday, Finance Minister Lan Fo’an outlined four measures, starting with increasing support for local governments in resolving debt risks. Only after outlining these four points did Lan tease that the country wanted to increase its debt and budget deficit.

“The press conference is consistent with our view that addressing local governments’ financing challenges is a priority,” Robin Xing, chief China economist at Morgan Stanley, and his team said in a report on Sunday. They also expect the central government to play a greater role in debt restructuring and stabilizing the housing market.

“However, we believe the scale-up of consumption support and social spending is likely to remain gradual,” Morgan Stanley analysts said.

The slump in China’s real estate market has created an important source of income for local governments, many of which have previously struggled financially. have to spend on Covid-19 measures. Meanwhile, subdued consumption and sluggish growth in general have increased calls for more fiscal stimulus.

The four policy measures announced by the Ministry of Finance are more focused on addressing structural problems, Chinese economic think tank CF40 said in a report on Saturday.

‘They are not specifically aimed at addressing macroeconomic problems such as insufficient aggregate demand or falling price levels Keynesian style fiscal expansion,” the report said, citing expectations of greater government intervention.

CF40 estimates that China will not need additional budget financing to achieve its full-year growth target of around 5%, as long as the spending it has already announced takes place by the end of the year.

Finance Minister Lan said on Saturday that the central government would allow local governments to use 400 billion yuan ($56.54 billion) in bonds to support spending on payroll and basic services.

He added that a major plan to tackle local governments’ hidden debts would be announced in the near future, without specifying when. Lan claimed that hidden debt levels at the end of 2023 were half of what they were in 2018.

Historically, local governments were responsible for more than 85% of expenditures but received only about 60% of tax revenues. Rhodium Group said in 2021.

Local government finances are limited “contributed to downward pressure on prices”, the International Monetary Fund said in an Aug. 30 report on China.

The main consumer price indexexcluding more volatile food and energy prices, rose 0.1% in September compared to a year ago. That’s the slowest since February 2021, according to the Wind Information database.

For Morgan Stanley, solving local government debt problems is a “critical step” toward halting the downward trend in prices – almost as important as stimulus measures aimed at boosting demand.

After a flurry of policy announcements in recent weeks, investors are looking ahead to a meeting of China’s parliament, expected at the end of this month. China’s legal process requires it to approve national budget amendments. Last year’s meeting, which ended on October 24, oversaw a rare increase of the budget deficit to 3.8%, from 3% according to state media.

Analysts are divided on the specific amount of budget support that may be needed.

‘Whether it’s 2 trillion [yuan] or 10 trillion, it doesn’t really matter to us,” Vikas Pershad, fund manager at M&G Investments, said Monday on CNBC’s “Squawk Box Asia.” “Our bet on China is a multi-year bet. . Chinese stocks are undervalued.”

He emphasized that the policy direction is “on the right track,” regardless of the size of the stimulus measures.

Pershad has been talking about buying opportunities in Chinese stocks since January, but he said on Monday that the latest wave of activity in the region has not made him more active in the sector.

Chinese policymakers have generally remained conservative. Beijing has not handed out cash to consumers after the pandemic, unlike Hong Kong or the US

Julian Evans-Pritchard, head of China economics at Capital Economics, said at least 2.5 trillion yuan in additional financing is needed to keep growth around 5% this year and next.

“Anything less than that, and I think the risk really is that the economy just continues to slow down next year given all the structural headwinds that it faces,” he said Monday on CNBC’s “Squawk Box Asia.”

Evans-Pritchard stressed that fiscal policy is crucial to tackling the latest economic slump, as China’s other support tools previously included real estate and credit, which are not as effective this time.

“It’s hard to put a specific figure on it because there’s obviously a lot of talk about recapitalizing the banks and addressing existing debt problems in local governments,” he said. “If a lot of the additional lending goes to those areas, it actually doesn’t stimulate current demand that significantly.”

— CNBC’s Sonia Heng contributed to this report.