When it comes to providing fiscal stimulus, Chinese authorities seem determined to avoid making the same mistakes they did in the past and to break through the debt wall that threatens the stability of the global financial system in order to spur growth in the second-largest economy in the world. Beijing has only laid out half of a strategy thus far, which is somewhat comforting.
The Ministry of Finance hinted at a long-anticipated press briefing on Saturday that it is prepared to dramatically increase spending, though it did not specify by how much. Those seeking rapid answers will be disappointed by the lack of a specific figure; on Monday, the Hang Seng and other Chinese benchmark indices for stocks began relatively unchanged. Economists estimate that the People's Republic might have to spend as much as 10 trillion yuan ($1.42 trillion), or 7% of GDP, to boost consumption.
It is also a message that Beijing will not spend indiscriminately, as it did with a package worth 4 trillion yuan following the global financial crisis of 2009. The International Monetary Fund estimates that the debt piled up by a subsequent infrastructure buildout over ten years ago is $9 trillion, or 48% of the GDP from the previous year. For the first time, the ministry acknowledged this complex issue as a significant barrier to development and outlined what it describes as its "biggest effort" to address it.
Local governments are essentially in charge of more than 80% of all government spending, which includes spending on necessities like healthcare and pensions. Three of the four new policies that were unveiled were intended to lessen the financial strain on these authorities.
The central government will be issuing special sovereign bonds to refuel state lenders, who will likely absorb the newly created local government debts; provinces can use the proceeds from special bond sales to buy housing or land to stabilize the property market; and there is going to be a one-time, massive expansion of the existing debt exchange program that local governments can use to issue bonds for the replacement of LGFV debt. This embodies a reversal of the roles that were played in 2009. This time, the federal government will borrow money in order to invest in fixed assets.
Although it is unknown what China will spend the money on and how it would raise revenue to pay down any further debt, the ministry vows more budgetary measures will be implemented. Before hastily trying to stimulate demand, officials are currently concentrating on strengthening the economy's fundamentals.