China increases its debt to boost its economy

Debt the country a little more to stimulate activity. This has been the Chinese mantra for several weeks. As new Finance Minister Lan Foan was appointed in a major cabinet reshuffle on October 24, Beijing announced plans to issue more sovereign bonds.

On Sunday, Lan Foan indicated that China would accelerate these new issues of Treasury bonds. In “a complex national and international situation”, the Ministry of Finance will focus on the risk linked to the debt of local authorities and try to better take advantage of the new bonds to stimulate the economy. He will also strive to improve the efficiency of fiscal policy, reports the state-run Xinhua news agency.

A 61-year-old technocrat with little experience in central government, Lan Foan took office in a delicate context. President Xi Jinping hopes to stimulate domestic consumption and consolidate the recovery of the world's second largest economy, penalized for months by a slow post-Covid recovery.

At the end of October, his government broadcast proactive signals regarding the budget deficit and public debt. Additional sovereign bond issues worth 1 trillion yuan, approximately €130 billion, were announced. Funds must be allocated to programs to rebuild disaster areas or prevent flooding.

“It is rare for central government plans to be revised outside of the usual budget cycle. This shows concern about short-term growth,” Capital Economics analysts then underlined. “Chinese authorities needed to pay more attention to growing debt at the subnational level and in local financing vehicles. They should strive to reduce the country's long dependence on real estate,” underlined Vitor Gaspar, director of fiscal affairs at the IMF, in mid-October in Marrakech.

An official meeting devoted to the country's finances was organized on October 30 and 31, Chinese press reports. But between the risks linked to the debt of local authorities and the worsening real estate crisis and the desire to revive economic activity, the Chinese authorities sometimes seem to be evading.

Beijing has authorized certain local governments to issue in advance bonds normally scheduled for 2024, in order to meet certain needs, the new Minister of Finance indicated on Sunday.

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At the same time, to enable the real estate sector, which contributes up to 15% of GDP, to participate in the recovery of the economy, the financial regulatory authority is reportedly easing loan conditions . The National Financial Regulatory Administration has reportedly reduced its requirements, particularly regarding banks' exposure to mortgage loans.

In the third quarter, the Chinese economy performed better than analysts expected. As a result, the government’s 5% growth target for the full year could be achieved. But headwinds persist, between the real estate crisis and the reluctance of private companies to spend in a context of low confidence. Several economists therefore anticipate a more marked slowdown in activity in 2024 than in 2023.