China will go into massive debt to stimulate its economy

China will also allow local governments to take on more debt to finance the purchase of developable land and thus stimulate the long-stagnant real estate market.

Finance Minister Lan Fo’an did not provide details at a press conference about the special bonuses announced. But he said China still has room “to issue debt and increase the deficit” to finance new measures.

In 2023, China had one of its weakest growth in the last three decades (5.2%), an official figure that, however, some economists questioned.

On Saturday, Lan said Beijing is “accelerating the use of additional treasury bonds, and special ultra-long-term treasury bonds are also being issued for use.”

“In the next three months, a total of 2.3 trillion yuan (about 325 billion U.S. dollars) in special bond funds can be made available for use in various places,” he added.

In addition, the Chinese government also plans to “issue special government bonds” to “improve the risk resistance and lending capabilities” of state-owned commercial banks, aiming to “better serve the development of the real economy.”

Real estate boost

Vice Finance Minister Liao Min said special bonds will be issued for local governments to acquire land for urban development purposes, a move expected to boost the real estate market.

This initiative “would help reduce the pressure on local governments and real estate companies in terms of debt and liquidity,” he explained.

Beijing will also encourage the purchase of existing commercial properties to be transformed into affordable housing.

But the fact that Beijing refrained from specifying the amount of these additional fiscal stimuli generated criticism among analysts.

“The key message is that the central government has the capacity to issue more bonds and increase the fiscal deficit and […] The central government plans to issue more bonds to help local governments pay off their debt,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management.

Beijing is probably “still working on the details,” Heron Lim of Moody’s Analytics told AFP.

“Lack of foresight”

Economic uncertainty has also weighed on consumption.

Julian Evans-Pritchard, director of the Chinese economy section at Capital Economics, highlighted the “notable absence” of “any mention of large-scale aid for consumers.”

“The lack of a forecast for the size of next year’s budget deficit means that it is still difficult to judge how much the fiscal stimulus will be and how long it will last,” he noted.

The Chinese government has said that it aims to grow 5% this year, a number that any Western country would like, but that is far from the double-digit expansion that the Chinese economy sustained for years.

While stimulus measures to alleviate economic uncertainty include cutting rates and making home purchases more flexible, economists say more than that is needed.

On Saturday, major Chinese banks announced they would lower interest rates on existing mortgages starting Oct. 25, according to state media.

With some exceptions such as second mortgages, “interest rates on other eligible mortgages will be adjusted” to no less than 30 basis points below the central bank’s reference interest rate, state broadcaster CCTV reported.

The banks announced that the adjustments “will be made uniformly… and customers will not have to request them,” CCTV added.

This week, China’s central bank increased support for markets by releasing tens of billions of dollars in liquidity for companies to buy shares.

Beijing said the 500 billion yuan (about $70 billion) swap mechanism would promote “the healthy and stable development of the capital market.”