(Bloomberg) — A leading economist in China said the country could boost budget support for the economy by issuing as much as 10 trillion yuan ($1.4 trillion) in special debt, reflecting rising expectations that Beijing will tighten government spending will expand as part of his policy. stimulus package.
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Jia Kang, former head of a research institute affiliated with the Finance Ministry, said authorities can boost confidence by dramatically increasing government investment in public projects. He said this in an interview with the Chinese publication The Paper published on Tuesday.
“As these projects take off, they will create jobs, increase income for citizens and unlock consumption potential,” said Jia, who now heads the China Academy of New Supply-Side Economics, a private think tank. Without giving a possible timeline, he said that “scaling up bond issuance now to 4 trillion or even 10 trillion yuan would not be excessive.”
The comments add to a growing discussion about what the Treasury Department will – or should – do to boost the world’s No. 2 economy, after Beijing signaled its desire to draw a line below the slowdown in growth. The 24-member elite Politburo urged officials to issue ultra-long special government bonds and local special notes to encourage investment without giving details, fueling speculation about the strength of the budget measures.
The debt issuance Jia suggested would be many multiples of the 1 trillion yuan of ultra-long special government bonds the government planned to sell this year. But he said this would be a proportionate increase over the 2008 4 trillion yuan stimulus package, as China’s gross domestic product had quadrupled in nominal terms by the end of 2023.
“Using sovereign debt mechanisms appropriately will not overburden the government,” he told The Paper. “Long and ultra-long government bonds, with maturities of 30 to 50 years, offer significant flexibility and are worth using because they remain within safe limits.”
Reuters reported last week that the Finance Ministry plans to issue 2 trillion yuan in special government bonds this year. That financing will be split evenly between boosting consumption and helping local governments tackle debt problems, the news agency said, citing two people familiar with the matter.
Jia’s ambitions are “realistic,” said Becky Liu, head of China Macro Strategy at Standard Chartered Plc. “This is more about the willingness to support, not so much the quantity – if it’s not enough, there will be more until it’s enough,” she said.
The stimulus measures in Beijing sparked a rally in stock markets, with the CSI 300 index rising the most since 2008 on Monday, before the country went on a weeklong holiday. An indicator of Hong Kong-listed Chinese companies rose for 13 consecutive sessions on stimulus optimism, before retreating on Thursday when the index fell as much as 4.9%.
Now the focus shifts to possible future budget support. Economists believe more spending is needed to boost domestic demand, with consumer confidence falling to its weakest level since November 2022 in August.
“In the near term, conventional fiscal policy is the key to watch as the government will release more details,” Macquarie Group Ltd. economists Larry Hu and Yuxiao Zhang wrote in a note on Monday. “Later in October, the government may announce more quotas for special government bonds or special local government bonds.”
In 2023, China’s top legislative body used its October session to approve the issuance of 1 trillion yuan of additional special government bonds.
According to Nomura Holdings Inc. and Morgan Stanley, the government would face some constraints as it considers its budget options.
Nomura’s chief Chinese economist Lu Ting said the government could invest in mega infrastructure projects, increase social security spending and directly finance delayed housing projects – effectively becoming the “builder of last resort.” But he cautioned against taking massive fiscal stimulus for granted.
“Beijing will certainly roll out a range of fiscal measures and other supportive policies, but the final size and content of the fiscal package could be quite improvised and uncertain due to the emerging stock market bubble and the still contentious debates over what Beijing should focus on. Lu wrote in a note on Thursday.
Economists at Morgan Stanley, including Chetan Ahya, echoed the caution, citing, among other things, the country’s current debt burden. China’s debt-to-GDP ratio rose to a record 286% earlier this year, according to central bank and statistics agency data compiled by Bloomberg.
“Demand for fiscal expansion will only increase from here,” Ahya, Asia’s chief economist, and others wrote in a note on Tuesday. “While there is no hard limit per se on how expansionary fiscal policy can be, we believe that policymakers may be naturally reluctant to provide significant adjustments against the backdrop of large budget deficits and high government debt.”
–With help from Tania Chen.
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