China’s finance ministry has urged local governments to speed up bond issuance to stabilize the country’s Covid-stricken economy.
Cabinet told provinces on Tuesday to issue $225 billion in bonds in June. He brought forward the deadline for issuing special bonds to pay for infrastructure by three months – to ensure that the year’s target of issuing 3.45 trillion yuan ($518 billion) is met. here the middle of the year.
The move comes amid reports that the government is facing a growing cash shortfall. nomura estimated that it faces a funding shortfall of about 6 trillion yuan (nearly $900 billion) due to falling land sales and other tax revenues amid weak oil production. factories.
“The latest wave of Omicron and the widespread lockdowns in place since mid-March have resulted in a sharp contraction in government revenue, including land sales revenue,” said Lu Ting, Nomura’s chief economist for the China, in a report last week.
National leaders are clearly disturbed by the severe economic downturn and rising unemployment caused by lockdowns in Shanghai and other cities, as well as factors such as the housing crisis, soaring inflation in many countries, and the effects of war in Ukraine.
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Series of policy measures
China’s cabinet last week unveiled a series of 33 policy measures to support the economy, but analysts say more stimulus will be needed to help bring the economy back to a sustainable recovery.
This means provinces are expected to issue nearly 1.5 trillion yuan in the coming weeks, based on Ministry of Finance figures showing issuance of 1.85 trillion yuan, or 54% of the total, as of 27 may. Funds raised must be used by the end of August.
The move could increase pressure on market liquidity and force the central bank to inject more liquidity, potentially via the bank’s medium-term lending facility and a reduction in reserve requirements, analysts at Guosheng Securities said.
Funds raised could be used to support a push towards new infrastructure focused on 5G, artificial intelligence and data, analysts said, with returns from traditional projects such as highways, railways and airports being now much lower.
The Chinese cabinet announced on Tuesday that it had approved new types of infrastructure and energy projects.
The increase in infrastructure spending follows a pattern Beijing has generally followed to boost its economy, although past efforts have led to a number of white elephant projects.
With the growing urgency to support an economy handcuffed by Beijing’s zero Covid policy, Premier Li Keqiang last week reiterated the need to step up policy support and said China would seek positive economic growth from a year-over-year in the second quarter.
Many private sector economists expect the world’s second-largest economy to contract in the April-June quarter, which would be the first since a deep recession in the first quarter of 2020.
More stimulation needed
Analysts say more stimulus will be needed in the coming months as Chinese cities ease lockdowns, with the risk that new outbreaks could spur new restrictions in the absence of a change in the broader policy of the city. China in terms of Covid.
Shanghai is lifting movement restrictions on most of its 25 million people from Wednesday.
Meanwhile, political advisers and thank you tanks are stepping up their calls for the central government to issue special bonds to help Covid-hit sectors and support infrastructure spending in the second half of the year.
“We need to actively prepare for it, and the size is expected to be similar to 2020,” said Jia Kang, director of the China Academy of New Supply-side Economics.
“We face serious challenges to meet the annual growth target, but at least we should strive to meet it,” said Jia, a former head of the finance ministry’s think tank.
Growth target “out of reach”
China has set an annual economic growth target of around 5.5% this year, but many economists believe that target is increasingly out of reach.
The China Wealth Management 50 Forum, a think tank, has called for the issuance of about 2 trillion yuan of special treasury bills, based on the need to raise economic growth to 6.5% in the second half to achieve annual growth of nearly 5%.
Getting the economy back on track takes on added urgency in a sensitive political year, when President Xi Jinping is set to secure a third term in office in the fall.
Guosheng Securities expects 1-1.5 trillion such bonds to be issued in August and September.
Zhang Ming, senior economist at the Chinese Academy of Social Sciences, a leading government think tank, said the government should raise its deficit target to 3.0-3.2 percent of GDP.
Any move to increase the budget deficit or issue special treasury bills would require parliamentary approval, while policymakers must assess the impact of existing stimulus before taking further action, political insiders said. .
“The scope for infrastructure investment is not large, and we need to avoid duplicate projects and ensure return on investment,” a political insider said.
In 2020, China issued 1 trillion yuan of special treasury bills to fund recovery and shore up the economy which was first hit by Covid-19.
• Reuters with additional editing by Jim Pollard
The title of this report has been changed and additional details added on May 31, 2022.
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