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On October 24th, during the sixth meeting of the Standing Committee of the National People’s Congress, Chinese legislators approved a groundbreaking plan.
I. Chinese Treasury Issuance Boosts Infrastructure Investment
This plan involves increasing Chinese Treasury Issuance by a staggering RMB 1 trillion (equivalent to US$136.8 billion). Furthermore, the 2023 budget deficit will experience a notable rise, climbing from RMB 3.88 trillion (3% of GDP) to RMB 4.88 trillion (3.8% of GDP). This marks a significant shift for China, as it adopts an intra-year budget revision for the first time since 2000.
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II. Water Conservancy Upgrades Address Urgent Infrastructure Needs
Why It Matters:
The move to expand fiscal measures comes as a response to a unique set of circumstances. Contrary to typical fiscal expansions aimed at boosting the economy, the necessity for such measures has been diminished by robust growth experienced in the third quarter. Additionally, pressure on Chinese policymakers to react to economic shocks has waned since 1998-2000 when intra-year budget adjustments were initially introduced. These adjustments were a direct response to the fallout from the Asian financial crisis and the mass layoffs stemming from state-owned enterprise reform.
The primary objective of this fiscal maneuver is not to invigorate economic growth but rather to address a pressing concern – the need to rebuild and upgrade water conservancy infrastructure. This need became particularly apparent after record-breaking typhoon rainfalls wreaked havoc in northern China this summer. Many local governments, already grappling with financial stress, are unable to finance these essential projects independently.
While China possesses commendable flood-prevention and climate change-resilience infrastructure for a developing nation, there is room for improvement. The Ministry of Finance has announced that the Chinese Treasury Issuance will allocate proceeds to various critical areas, such as disaster recovery, flood prevention, disaster preparedness, and farmland improvement in regions affected by flooding.
The urgency of this arrangement is evident in the allocation of RMB 500 billion (US$68.4 billion) for the remainder of 2023, with the rest earmarked for 2024. This mirrors the fact that water conservancy projects in China typically occur between November and April, which corresponds to a dry period in most parts of the country. Waiting for issuance until the “two sessions” in March 2024 would be deemed too late by the government.
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III. Fiscal Policy Signals Central Government’s Flexibility
While the Chinese Treasury Issuance isn’t primarily intended to stimulate economic growth, analysts foresee it driving an uptick in forecasts. They expect the acceleration of infrastructure investment from November onward to provide a moderate boost to incremental GDP growth. However, this will coincide with increased Chinese Treasury supply. This, in turn, will drain liquidity in the banking system, already grappling with rising government bond issuance.This may necessitate liquidity injections by the People’s Bank of China (the central bank) through repurchase agreements, medium-term lending facilities, or a reduction in the reserve requirement ratio.
IV. Anticipating the Future: Implications for Economic Stability
What’s Next:
The upward adjustment to the deficit brings a moderate upside risk to full-year GDP forecasts for 2023, as well as for the years 2024-26 during the construction cycle. Importantly, the Chinese Treasury Issuance highlights the central government’s willingness to adopt more flexible fiscal arrangements and make use of its fiscal room, instead of leaning on local authorities to borrow. This strategic shift in fiscal policy demonstrates China’s commitment to addressing critical infrastructure needs while ensuring economic stability in the face of challenges.
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Disclaimer:
Please note that this article serves solely for informational purposes. As such, Gold tests it is not financial advice. We strongly advise readers to conduct thorough research and consult with financial professionals before making any investment decisions.
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