China’s planned fiscal expansion will boost growth

What’s happened?

On October 24th, at the sixth meeting of the Standing Committee of the National People’s Congress (the legislature), Chinese legislators approved a plan to increase Treasury issuance by Rmb1trn (US$136.8bn). The budget deficit for 2023 will be increased from Rmb3.88trn (or 3% of GDP) to Rmb4.88trn (3.8% of GDP). This is the first time that China has adopted an intra-year budget revision since 2000.

Why does it matter?

We do not believe that the planned fiscal expansion is primarily aimed at boosting the economy, the necessity of which has been minimised by firming growth in the third quarter. Pressure on Chinese policymakers to respond to shocks have also diminished since 1998-2000, when intra-year budget adjustments were introduced amid the fallout of the Asian financial crisis and mass layoffs caused by state-owned enterprise reform.

Instead, we see this as an ad hoc move to rebuild and upgrade water conservancy infrastructure after record typhoon rainfalls in northern China this summer, especially as local governments, many of which are financially stressed, are incapable of financing projects themselves. China has good flood-prevention and climate change-resilience infrastructure for a developing country, but there is room for improvement. The proceeds from the Treasury issuance will be allocated to areas including disaster recovery, flood prevention, disaster preparedness and farmland improvement in flood-hit regions, according to the Ministry of Finance. The urgency of the arrangement—with Rmb500bn (US$68.4bn) earmarked for the remainder of 2023, and the rest for 2024—mirrors the fact that water conservancy work in China is normally carried out between November and April, which is a dry period in most parts of the country. An issuance “as usual” after the budget-setting “two sessions” in March 2024 would be too late in the government’s eyes.

Although the issuance is not primarily aimed at bolstering growth, it will exert upward pressure on our forecast. We estimate that a resulting acceleration of infrastructure investment from November will lead to a moderate boost in incremental GDP growth. Increased Treasury supply will drain liquidity in the banking system, which already has to cope with rising government bond issuance. This will probably require liquidity injections by the People’s Bank of China (the central bank) through repurchase agreements, medium-term lending facilities or a cut to the reserve requirement ratio.

What next?

The upward adjustment to the deficit will add moderate upside risk to our full-year GDP forecast for 2023, as well as for 2024-26 during the construction cycle. Crucially, the issuance hints at the central government’s willingness to adopt more flexible fiscal arrangements and tap into its own fiscal room, rather than pushing local authorities to borrow.

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