China’s 1 trillion yuan debt plan isn’t necessarily such a big deal

BEIJING — Chinese authorities late Tuesday announced one of the biggest changes to the national budget in years, along with the issuance of 1 trillion yuan in ($137 billion) in government bonds.

But state media made it clear that whopping amount would be focused on reconstruction of areas hit hard by natural disasters — such as this summer’s historic floods — and for catastrophe prevention.

“The sheer amount of 1 trillion is not that significant, certainly not a game changer,” Larry Hu, chief China economist at Macquarie, said in an email. “But it’s still a modest positive surprise, as it’s not anticipated by the market.” 

The Hang Seng Index climbed more than 2% in morning trade Wednesday, and back above the psychologically key 17,000 level. Major mainland China stock indexes were up broadly.

Both Hong Kong and mainland Chinese stocks have fallen so far this year amid China’s lackluster recovery from the pandemic.

“We believe the economic impact of this RMB1.0trn in additional [central government bonds] should not be overstated, especially in the near term,” Nomura’s chief China economist Ting Lu said in a note.

He said he doesn’t expect much of the funds to be used until next year, or even in the next two or three years. That’s because most of the natural disasters this year hit China’s northern region over the summer, and the country is now heading toward the winter months, he said.

Chinese state media said the 1 trillion yuan in central government issuance is set to be transferred to local governments in two parts, half for this year and half for next year.

“The overall size of the additional funding does not appear to be sizeable relative to the local government’s funding base,” said Rain Yin, associate director at S&P Global Ratings.

“It is roughly around 5% of transfer revenues or 2% of total revenues for the local governments,” Yin said. “However, this funding could be crucial and meaningful in supporting selective provinces, especially in regions that have suffered from disasters and have needed to resort to more borrowings to support local economic recovery and development.”

The economy remains on track for Beijing’s target of around 5% growth this year, but that’s below more optimistic forecasts at the start of 2023. The International Monetary Fund this month also cut its forecast for China’s growth in 2024 to 4.2%.

“In our view, more efficient ways to add central government spending include: (1) supporting the completion of new homes that were pre-sold by developers and (2) stepping up infrastructure spending in cities with rising populations,” Nomura’s Lu said.