Core Viewpoints

Item: On October 12, 2024, the State Council Information Office invited the Minister of Finance, Lan Fo'an, and others to hold a press conference.

I. Ensure the achievement of the annual budget target. Minister Lan stated, "Here, I can responsibly tell everyone that China's finance has enough resilience, and by taking comprehensive measures, it is possible to achieve a balance of income and expenditure and complete the annual budget target." The market's concern about achieving the annual budget target is that, based on the current trend of fiscal revenue growth, the total general public budget revenue for the year will be nearly 1.3 trillion yuan less than the budget at the beginning of the year. To achieve a balance of income and expenditure and complete the general public budget target, there are two paths: First, transfer funds from the budget stabilization adjustment fund, government fund budget, and state-owned capital operation budget. The Ministry of Finance mentioned all three points this time, among which the clear one is the 400 billion yuan of local government's remaining quota, which will be fully or partially transferred to the general public budget after issuance from the government fund budget. Second, expand the deficit scale. At the end of 2023, the national debt balance had a remaining quota of 830 billion yuan, the local general debt balance had a remaining quota of 680 billion yuan, and the local special debt balance had a remaining quota of 750 billion yuan. Without adjusting the budget deficit, using the remaining 800-900 billion yuan of national debt or local general debt can achieve the goal. This only considers achieving the hard general public budget target. The larger gap in this year's fiscal revenue and expenditure lies in the government fund budget. According to the current growth rate projection, the annual government fund revenue gap is nearly 1.5 trillion yuan. In combination with "the central finance still has a larger debt space and deficit expansion space," it is highly likely that the National People's Congress will adjust the budget later, and the scale of additional national debt issuance may be in the range of 1.5-2.5 trillion yuan (government fund revenue gap of 1.5 trillion yuan + or not using the above-mentioned remaining 800-900 billion yuan from previous years).

II. Strengthen support for local governments to resolve government debt risks. This is the biggest highlight of this press conference. First, there is still nearly 300 billion yuan of issuance space for the "special refinancing bonds" arranged within the year. According to the press conference, the local government debt funds arranged for debt resolution in 2024 have reached 1.2 trillion yuan, among which the scale of the "special refinancing bonds" that activate the quota is about 400 billion yuan. According to the statistics of Enterprise Early Warning, as of October 12, the scale of "special new special bonds" issued within the year is about 821 billion yuan, basically reaching the predetermined target; the scale of "special refinancing bonds" issued is about 113.3 billion yuan, and the remaining to be issued within the year is less than 300 billion yuan. Second, to support debt resolution, the local government debt quota will be increased at one time. Combining the existing local government hidden debt and the previous debt resolution scale, we estimate that the scale limit of this one-time increase in local government debt quota is about 10 trillion yuan, lower than the 12.2 trillion yuan from 2015 to 2018. Since the process of resolving the existing local government debt has passed half at the end of 2023, the remaining hidden debt to be resolved from 2024 to the end of 2027 is expected to be between 10-15 trillion yuan. In terms of the lower limit, we estimate that the scale of the one-time adjustment of local government debt quota is not less than 5 trillion yuan. This is mainly based on the fact that since July 2023, the local government debt quota arranged for debt resolution has reached 3.4 trillion yuan, and the expressions of "large scale" and "the largest support for debt resolution in recent years" at the Ministry of Finance press conference imply a greater space for acceleration compared to before. Third, "Taking 2023 as an example, the grassroots 'three guarantees' expenditure accounts for about 50% of the available financial resources, and if other rigid expenditures are added, it accounts for about 80% of the available financial resources," which has occupied a lot of local energy. After this "greatly reducing the pressure of local debt resolution, more resources can be freed up for economic development."

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III. Support and promote the real estate market to stop falling and stabilize. Minister Lan pointed out, "By superimposing the use of local government special bonds, special funds, tax policies, and other tools, support and promote the real estate market to stop falling and stabilize." The most important thing is: allowing special bonds to be used to purchase existing commercial housing as affordable housing in various places. A major pain point in the collection of commercial housing was that the project cost and benefit were difficult to balance. On September 24, the central bank announced that it would increase the proportion of the People's Bank of China's contribution in the 300 billion yuan affordable housing reloan policy from the original 60% to 100%, thereby reducing the cost of commercial banks providing funds to the reloan rate of 1.75%. If an additional 1.5% interest difference is added, the project cost is about 3.25%. After this special bond is allowed to provide funds, considering that the average issuance rate of local special bonds from January to August is 2.4%, it may pull the project's comprehensive cost to below 3%, which is closer to the rental return rate of about 2%. The feasibility of the commercial housing collection policy will be improved, which can effectively promote the stabilization of housing prices. Of course, in addition to the price of funds, the scale of funds is also very important. We estimate that the realization of effective inventory reduction in real estate collection may require funds at the level of 2 trillion yuan, which needs to be considered in the local special bond quota.

IV. In addition to the aforementioned measures, there are two important initiatives worth noting at the Ministry of Finance press conference. First, issue special national bonds to support large state-owned commercial banks in supplementing core tier-one capital. This is a policy that combines finance and currency, and its intention is to enhance the risk resistance of large state-owned banks, enhance their credit allocation capacity, and help give full play to the important role of large state-owned banks in local government debt resolution. In the context of the significant narrowing of net interest margins of commercial banks, supplementing commercial bank capital also indirectly expands the space for further interest rate cuts in monetary policy. A reference case is that since 2020, China has arranged a total of 550 billion yuan of special bond quotas for capital supplementation of small and medium banks; in 1998, China issued 270 billion yuan of special national bonds, and the raised funds were used to supplement the capital of large state-owned banks. Second, increase support and protection for key groups. In terms of fiscal subsidies to promote consumption that the market is concerned about, the focus of the Ministry of Finance is still on key groups such as people in difficulty, students, and the elderly, and there is still a need for finance to take greater steps in promoting consumption.

On October 12, 2024, the State Council Information Office invited Minister of Finance Lan Fo'an and others to introduce the situation related to "increasing the counter-cyclical adjustment strength of fiscal policy and promoting high-quality economic development." At the meeting, the Ministry of Finance introduced a package of incremental policy measures that will be introduced in the near future, injecting strong confidence into the current stable growth of China's economy.

I. Ensure the achievement of the annual budget targetMinister Lan pointed out, "It is expected that the national general public budget revenue growth will not meet expectations." "Here, I can responsibly tell everyone that China's finance has enough resilience, and by taking comprehensive measures, it can achieve a balance of revenue and expenditure and complete the annual budget targets."

The market's doubt about achieving the annual budget targets lies in the fact that the national public finance revenue growth rate for January-August was only -2.6%. Extrapolating this growth rate to the whole year, the annual general public budget revenue would be 21.1 trillion, nearly 1.3 trillion less than the initial general public budget revenue. To achieve a balance of revenue and expenditure and complete the general public budget targets, there are two paths:

Firstly, from the budget stabilization adjustment fund (this time "guide localities to use the budget stabilization adjustment fund and other existing funds in accordance with laws and regulations"), government fund budget (this time "arranged 400 billion yuan from the local government debt balance limit"), and state-owned capital operation budget transfer funds (this time "encourage localities with conditions to activate idle assets and strengthen the management of state-owned capital returns"). The Ministry of Finance mentioned all three points this time, among which the clear one is the 400 billion yuan of local government balance limit, which will be transferred to the general public budget from the government fund budget in full or in part after issuance.

Secondly, according to the "State Council's Report on the Management of Government Debt in 2023," at the end of 2023, the national debt balance is 830 billion yuan short of the limit, the local general debt balance is 680 billion yuan short of the limit, and the local special debt balance is 750 billion yuan short of the limit. This time, 400 billion yuan of local special debt was announced to be used, and without adjusting the budget deficit, another 800-900 billion yuan of national debt or local general debt balance can be used to achieve the target.

This is only considering the realization of the hard general public budget target. The larger gap in this year's fiscal revenue and expenditure lies in the government fund budget: the national government fund revenue growth rate for January-August was only -21.1%, extrapolated to the whole year, the annual government fund revenue will be nearly 1.5 trillion yuan less than the initial government fund budget revenue. According to the current growth rate extrapolation, the annual government fund expenditure will be nearly 3.5 trillion yuan less than the initial budget, considering "in the last three months, there are 2.3 trillion yuan of special bond funds that can be arranged for use across the country," it also means a budget gap of 1.2 trillion yuan. Therefore, combining "the central finance still has a larger debt space and deficit increase space," it is likely that the National People's Congress will adjust the budget later, and the scale of issuing national debt/local debt may be in the range of 1.5-2.5 trillion yuan (government fund revenue gap of 1.5 trillion yuan + possibly not using the above-mentioned previous years' balance of 800-900 billion yuan).

II

Strengthen support for localities to resolve government debt risks

This is the biggest highlight of this press conference.

Firstly, there is still nearly 300 billion yuan of issuance space for the "special refinancing bonds" arranged within the year. From the press conference statement, the local government bond funds arranged for debt resolution in 2024 have reached 1.2 trillion yuan, among which the scale of "special refinancing bonds" that activate the limit is about 400 billion yuan. "Since 2024, after going through relevant procedures, the Ministry of Finance has arranged 1.2 trillion yuan of debt limits to support localities in resolving existing hidden debts and digesting government arrears to enterprises." "This year, using the debt balance limit, a debt limit of 400 billion yuan has been issued to localities to supplement comprehensive financial strength." According to the statistics of Enterprise Early Warning, as of October 12, the scale of "special new special bonds" issued within the year is about 821 billion yuan, basically reaching the predetermined target; the scale of "special refinancing bonds" issued is about 113.3 billion yuan, and the remaining to-be-issued quota within the year is less than 300 billion yuan.

Secondly, to support debt resolution, the local government debt limit will be increased in one go. We estimate that the overall scale can reach 5 trillion to 10 trillion yuan, and the increase in the local government bond debt limit may be used to issue replacement bonds. "It is planned to increase the debt limit in a large scale in one go to replace the existing hidden debts of local governments, increase the support for localities to resolve debt risks, and the relevant policies will be explained in detail to the society after going through the legal procedures. It needs to be emphasized that this policy to be implemented soon is the measure with the largest support for debt resolution in recent years."Firstly, let's review the debt reduction scales in the several rounds following the implementation of the new Budget Law. In the three rounds from 2015-2018, 2019, and 2020-2022, the amounts for the replacement of local hidden debts were 12.2 trillion, 157.9 billion, and 1.117 trillion yuan, respectively. Since July 2023, the Ministry of Finance has arranged a total of 3.4 trillion yuan in local government debt limits for debt resolution ("On the basis of the central finance arranging more than 2.2 trillion yuan in local government debt limits in 2023, an additional 1.2 trillion yuan was arranged in 2024 to support localities, especially high-risk areas, in resolving existing debt risks and clearing arrears to enterprises, etc.").

Secondly, the resolution of local government hidden debts has achieved certain results. "By the end of 2023, the outstanding balance of hidden debts included in the government debt information platform nationwide was reduced by 50% compared to the 2018 baseline." In August 2018, Document No. 27, "Opinions on Preventing and Resolving the Risks of Local Government Hidden Debts," required local governments to resolve hidden debts within 5-10 years. Referring to the compilation in the book "Balancing Development and Security: Research on Chinese Government Debt," we estimate that the national hidden debt balance identified by the Ministry of Finance in 2018 was between 20-30 trillion yuan. For instance, the IMF estimated the scale of local government hidden debts in 2018 at 30.29 trillion yuan; S&P Global Ratings estimated the national hidden debt scale in 2018 at 30-40 trillion yuan; Mao Zhenhua and others estimated the scale of local government hidden debts in 2018 at 21-30.5 trillion yuan; the National Financial Development Laboratory of the Chinese Academy of Social Sciences and the Institute of Fiscal Science at Tsinghua University estimated the local government hidden debt scale at the end of 2017 to be around 30 trillion yuan; Li Yang and others, as well as Zhang Xiaojing, estimated the national hidden debt scale at the end of 2018 to also be around 30 trillion yuan.

Lastly, combining the stock and previous scale of local government hidden debts, we estimate that the upper limit of the one-time adjustment of local government debt limits this time is around 10 trillion yuan, lower than the 12.2 trillion yuan from 2015-2018. Since the process of resolving existing local government debt has passed the halfway point by the end of 2023, the remaining hidden debt to be resolved from 2024 to the end of 2027 is expected to be between 10-15 trillion yuan. As for the lower limit, we estimate that the one-time adjustment of local government debt limits will not be less than 5 trillion yuan. This is mainly based on the fact that since July 2023, the local government debt limits arranged for debt resolution have reached 3.4 trillion yuan, and the expressions "large scale" and "the greatest support for debt resolution in recent years" at the Ministry of Finance's press conference imply a greater room for increased effort compared to before.

Thirdly, how to understand the relationship between local government debt resolution and stable growth? Since 2023, local governments have continued to face reduced revenues, and completing grassroots "three guarantees" and rigid expenditures have already occupied a lot of energy. According to the Ministry of Finance's press conference, "Taking 2023 as an example, grassroots 'three guarantees' expenditures account for about 50% of the available financial resources, and if you add other rigid expenditures, they account for about 80% of the available financial resources." At the same time, the acceleration of hidden debt resolution once again occupies the limited financial resources of localities, thus constraining the space for local fiscal support for stable growth. The press conference stated, "This is undoubtedly a timely policy rain, greatly easing the pressure of local debt resolution, freeing up more resources for economic development, and boosting the confidence of business entities."

III

Supporting and Promoting the Stabilization and Recovery of the Real Estate Market

Minister Lan pointed out, "The combined use of local government special bonds, special funds, tax policies, and other tools to support and promote the stabilization and recovery of the real estate market." A certain scale of fiscal support will be a key link in the stabilization and recovery of the real estate market.

The most important is: allowing special bonds to be used for the purchase of existing commercial housing as affordable housing in various regions. A major pain point in the collection of commercial housing was the difficulty in balancing project costs and benefits. On September 24, the central bank announced that it would increase the proportion of the People's Bank of China's contribution in the 300 billion yuan affordable housing re-lending policy from the original 60% to 100%, thereby reducing the cost of commercial banks providing funds to equal the re-lending rate of 1.75%. If you add a 1.5% interest margin, the project cost is about 3.25%. After this allowance for special bonds to provide funds, considering that the average issuance rate of local special bonds from January to August was 2.4%, it may pull the comprehensive project cost down to below 3%, closer to the rental return rate of about 2%. It is expected that the feasibility of the commercial housing collection policy will be improved, thus effectively promoting the stabilization and recovery of housing prices. Of course, in addition to the price of funds, the scale of funds is also very important. In our previous report "Three Considerations for the New Real Estate Policy," we estimated that realizing effective inventory reduction through real estate collection may require funds at the trillion level, which requires comprehensive consideration within the local special bond quota.

In addition, the finance also proposed this time: 1) Optimize and adjust the subsidy funds for affordable housing projects, appropriately reduce the scale of new construction, and support localities to collect affordable housing sources more through the digestion of existing housing. The scale of this part of the funds is relatively not as large, the Ministry of Finance pointed out that "in the past three years, the central finance has arranged a total of 212.4 billion yuan in subsidy funds for affordable housing projects," but it is also a necessary and appropriate direction for adjustment. 2) In addition to the already implemented "sell old, buy new" phased individual income tax rebate policy for housing exchange, it will also "hurry up to study and clarify the value-added tax and land value-added tax policies that are connected with the cancellation of ordinary and non-ordinary residential standards," supporting the stabilization and recovery of the real estate market from the tax level.Supporting state-owned large banks in capital replenishment and focusing on key groups

In addition to the aforementioned measures, there are two important initiatives worth noting from the Ministry of Finance's press conference.

Firstly, the issuance of special government bonds to support state-owned large commercial banks in replenishing their core tier-one capital. This is a policy that combines fiscal and monetary measures, aimed at enhancing the risk resistance and credit extension capabilities of state-owned large banks, and also helps to fully leverage the important role of state-owned large banks in resolving local government debt. Against the backdrop of a significant narrowing of net interest margins for commercial banks, replenishing the capital of commercial banks also indirectly expands the space for further interest rate cuts by monetary policy. At the press conference, the Ministry of Finance emphasized the approach of "overall promotion, phased implementation, and tailored policies for each bank," without specifying the scale of support. A reference case is that since 2020, China has arranged a total of 550 billion yuan in special bond quotas for capital replenishment of small and medium-sized banks (according to data from the People's Bank of China's "China Financial Stability Report (2021)" and the Ministry of Finance's "Report on the Implementation of China's Fiscal Policy in the First Half of 2022," the new special bond quotas arranged by the Ministry of Finance for supporting small and medium-sized banks to replenish capital in 2020, 2021, and 2022 were 200 billion yuan, 150 billion yuan, and 200 billion yuan, respectively, and the unused quota can be carried over to the next year); in 1998, China issued 270 billion yuan in special government bonds, and the funds raised were used to supplement the capital of state-owned large banks.

Secondly, increasing support and protection for key groups. In terms of fiscal subsidies to promote consumption, which the market is concerned about, the Ministry of Finance's focus is still on key groups such as people in difficulty, students, and the elderly, including: "Before this year's National Day, one-time living allowances were issued to people in extreme difficulty, such as those in severe distress and orphans"; "Next, efforts will be increased to reward and assist students in difficulty"; "In 2024, the minimum standard for the basic pension for urban and rural residents was further raised, marking the largest increase in the historical adjustment幅度." There is still room for the fiscal sector to take bigger steps in promoting consumption.