After the pandemic, major overseas economies shifted from "loose monetary policy" to "loose fiscal policy".
With the central financial work conference setting the tone for "optimizing the debt structure of central and local governments", the path of "loose fiscal policy" characterized by central leverage has become increasingly clear.
Looking forward to 2024, the resolution of implicit debt will continue, and it is expected that the government may continue to issue 2-3 trillion yuan in special refinancing bonds.
The central bank is also expected to continue providing emergency liquidity financial tools to provide liquidity support for local governments with heavy debt burdens.
From the package of debt reduction to the increase in the deficit ratio, in 2023 we witnessed a milestone fiscal event in China.
As the central financial work conference set the tone for "optimizing the debt structure of central and local governments", the path of "loose fiscal policy" characterized by central leverage has become increasingly clear.
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From the perspective of China's economy, whether it is the mid-year increase in the deficit or the deficit ratio breaking through 3%, it is indeed rare in history.
However, if we look at the global perspective, after the pandemic, a more active fiscal policy seems to have become a common choice for major overseas economies.
The average deficit ratio in Europe and America in 2023 reached 4.8%.
In comparison, the shift in China's fiscal policy seems a bit "late".
In addition to the adherence to fiscal discipline, the risk of local implicit debt is also an important factor.
However, as the debt reduction work gradually got on track after the third quarter, the further strengthening and efficiency of the fiscal end naturally came onto the agenda.
The issuance of trillion yuan of government bonds in the fourth quarter is a positive signal, especially in the "non-epidemic year" when the fiscal deficit ratio broke through the "warning line" of 3%, reflecting China's adjustment and innovation of fiscal policy.
Under the condition that there is still room for central fiscal leverage and "quasi-fiscal" still has spare capacity, we can have more expectations for China's "loose fiscal policy" in the future.
01 How far is China from the "loose fiscal policy" of Japan and the United States?
From a global policy environment perspective, major overseas economies have shifted from "loose monetary policy" before the pandemic to "loose fiscal policy".
From after the 2008 financial crisis to before the pandemic, the policy characteristics of major economies in Europe and America were that monetary policy turned quickly and with a large range, but incremental fiscal policies always "came out after a thousand calls".
After the pandemic, major economies have been more cautious in monetary policy, but more generous in fiscal policy, frequently breaking through the 3% deficit ratio warning line.
There are two reasons behind this.
On the one hand, after a long period of easing, the effectiveness of monetary policy has been greatly reduced.
On the other hand, the emphasis on national security and international competition has made the governments of major countries put down their concerns about fiscal expansion.
After the impact of the pandemic, it is not uncommon for overseas countries to add deficits, and Japan and the United States are typical examples.
They are both to ensure the living standards of residents and to deal with complex geopolitical situations.
Taking Japan as an example, Japan's two additional deficits were all under the situation of a high budget base.
In 2022, Japan approved a fiscal budget of 107.6 trillion yen, and supplemented the budget twice in May and November.
The second additional amount was as high as 28.9 trillion yen, aiming to deal with the impact of rising prices and the new crown epidemic on the economy.
This has made the fiscal budget that had already reached a new high in 2022 rise to about 140 trillion yen, with a deficit ratio close to 8%.
The United States is a "normal" fiscal budget, resulting in a continuous increase in deficit pressure year by year.
The United States' additional fiscal budget is not exclusive to the new crown epidemic period.
In 2023, the United States successfully added three times a total of 15.1 billion yuan of expenditure, mainly to deal with the impact of high inflation.
It includes 7.8 billion yuan to deal with more expensive medical expenses, and 1.4 billion yuan for additional social security-related expenditures.
This has made the deficit of the United States in this fiscal year rise to nearly 170 billion US dollars, and the deficit ratio increased from 5.4% in 2022 to 6.3%.
In the fiscal year of 2024, in order to support the wars in Israel and Ukraine, Biden applied for an additional expenditure of 105 billion US dollars at the beginning of the year, of which nearly 60% was used to assist Ukraine.
It should be noted that the United States is still relying on temporary resolutions to support the new fiscal year, and the latest budget for the fiscal year of 2024 has reached a new high of 6.9 trillion US dollars.
In addition to the active policies at the beginning of the epidemic, China's fiscal policy is more cautious and restrained.
In the early stage of the epidemic in 2020 and 2021, China's deficit ratio briefly broke through the shackles of 3%, but quickly returned to below 3%, and the scale and rhythm of fiscal expenditure were obviously slowed down.
Objectively speaking, China's fiscal caution after the epidemic, in addition to the adherence to fiscal discipline, the risk of local implicit debt is also an important factor.
Faced with the continuous decline of local government land transfer income and the increasing pressure to repay debts, the Politburo meeting in July proposed to "effectively prevent and resolve local debt risks", and a new round of special refinancing bonds were issued in September, reflecting the central government's emphasis on local debt reduction.
In this context, the latest central financial work conference's mention of local debt risks is not surprising.
The more novel proposal is to "establish a long-term mechanism for preventing and resolving local debt risks", which means that a government debt management mechanism that is compatible with high-quality development needs to be established.
With the basic formation of the local debt reduction framework and the steady progress of debt reduction, the focus of fiscal work can gradually shift from "preventing risks" to "stabilizing growth", and the further strengthening of fiscal efforts will naturally be on the agenda.
02 The issuance of government bonds increases, conveying a positive confidence to the market.
Against this background, the issuance of trillion yuan of government bonds in the fourth quarter and the increase in the deficit ratio can be described as timely actions.
The special feature of this issuance of 1 trillion yuan of government bonds is that it will be managed as special government bonds, but it is not essentially special government bonds, because special government bonds are not included in the fiscal deficit and are accounted for by the "second book", that is, the government fund budget.
The government bonds issued this time are actually "first book", that is, general public budget and included in the fiscal deficit of general government bonds, which is similar to the long-term construction government bonds in 1998.
Why should it be managed as special government bonds?
We believe that the main reason is that special government bonds are usually earmarked for specific purposes and have clear specific fund uses.
It can not only prevent the misappropriation of funds, but also help funds to be quickly put into projects and form physical work volume.
Especially for areas in urgent need of post-disaster reconstruction, this fund can alleviate the urgent financial needs of local governments, which is also an indirect debt reduction.
Increasing the deficit ratio is just a small step for central fiscal leverage.
Strictly speaking, the scale of this issuance of government bonds is not large.
Compared with the "four trillion" plan in 2008, which accounted for 12.5% of the GDP at that time, the current issuance of 1 trillion yuan of government bonds only accounts for 0.8% of the current GDP.
The central government has made it clear that the funds will be used for post-disaster recovery, which also proves that the authorities have no plan to launch a "flood irrigation" stimulus policy.
However, in the face of greater pressure on fiscal revenue, especially local fiscal revenue, this issuance of trillion yuan of government bonds is of great significance, marking a solid step for the central leverage to offset the decline of local financial strength.
Given the weakness of the real estate market, the current local government land transfer income has shrunk by about 20% year-on-year, and this situation has lasted for nearly two years; the further decline of land transfer income will result in a deficit of 0.7-1 trillion yuan in the net income of local government funds.
Therefore, the new issuance of 1 trillion yuan of government bonds can roughly make up for the budget gap of local governments.
All the 1 trillion yuan of government bonds issued this time are arranged for local use through transfer payments, and the principal and interest are repaid by the central government, without increasing the burden of local repayment.
This is undoubtedly a timely help for local governments with greater pressure on fiscal revenue and expenditure operations.
Although the scale of this issuance of government bonds is not large, the positive signal conveyed is very strong.
For the stock market, the increase in the deficit ratio this time can be regarded as a means to boost confidence.
After all, the last time the Standing Committee of the National People's Congress increased the deficit ratio was in August 2000.
Historically, after the "special" government bonds emerged, they could drive the rise of the stock market for a period of time.
Taking the long-term construction government bonds that are also included in the fiscal deficit as an example, after the Standing Committee of the National People's Congress approved the increase in the fiscal deficit in August 1998, it had a certain stimulating effect on the stock market and successfully achieved the bottom rebound of the stock market's activity.
This time is no exception.
After the Standing Committee of the National People's Congress approved the issuance of government bonds on October 24, the activity of the stock market obviously increased, and the Shanghai Composite Index once again stood above 3000 points.
For fiscal policy, on the premise that the difficulty of achieving the 2023 GDP target is not great, the issuance of government bonds at the end of the year is more to exert power in advance for the economic growth of 2024, especially the 500 billion yuan to be carried over for next year is expected to help the "good start" of the first quarter of 2024.
It can be seen that in the non-epidemic year, the fiscal deficit ratio breaking through the warning line of 3% highlights China's adjustment and innovation of fiscal policy.
The subsequent efforts to strengthen and improve efficiency should be more active, and considering that a more active fiscal policy has become a common choice for major overseas economies after the epidemic, this increase in the deficit ratio indicates that China may also start to shift to "loose fiscal policy" like other major economies, and central fiscal leverage will have a lot to do.
03 How much room is there for central fiscal leverage in the future?
For a long time, the leverage of local governments in China has been far greater than that of the central government.
In the face of tight local financial resources, the central government may take on the main role of leverage in the future.
We believe that there is still a lot of room for central fiscal leverage in China at present.
The internationally recognized warning line for the debt burden ratio is that developed countries should not exceed 60% and developing countries should not exceed 45%.
However, the proportion of China's government bond balance to GDP in 2022 is only 21.4%, which is not high compared with other major economies, especially developed countries.
If the proportion of government bond balance to GDP is estimated not to exceed 45%, the issuance space of China's government bonds is about 28.6 trillion yuan.
It can be seen that the potential for China to issue more government bonds is still quite large, and there is still room for the central government's debt to increase.In addition to this, "quasi-fiscal" policies can also provide ample "ammunition" for fiscal policy to exert its strength.
Compared to other countries, the scale of our central bank's balance sheet is relatively small, with the total assets of our central bank accounting for about 33% of GDP.
Amid "headwinds" such as falling housing prices, weak demand, and deteriorating expectations, the central bank also has considerable room to expand its balance sheet, especially by working in concert with policy banks to increase credit expansion and provide momentum for economic growth.
Therefore, China's monetary policy in the future will strengthen its coordination and cooperation with fiscal policy to jointly facilitate the accelerated recovery of the economy.
In summary, "clean the house before inviting guests"; if fiscal policy in 2023 leans more towards the debt resolution work of local governments, then in 2024, on the basis of continuing debt resolution, the Chinese-style "expansionary fiscal policy" will see the central fiscal and quasi-fiscal policies working in tandem.
Looking back at 2023, under the circumstances of excessive fiscal pressure and rising debt repayment pressure on local governments, the focus of fiscal policy has been more on resolving the risks of implicit local government debt.
From the "comprehensive debt resolution plan" at the July Politburo meeting to the policy orientation of "optimizing the debt structure of central and local governments" at the once-in-five-years Central Financial Work Conference, the mention of local debt resolution in this year's high-profile meetings is not uncommon.
According to the policy orientation of the Central Financial Work Conference, we believe that the government plans to adjust the fiscal relationship and debt structure between the central and local governments, and to address the repayment issues of local implicit debt.
More specific rules and guidance are expected to be introduced in the coming months.
Looking forward to 2024, the resolution of implicit debt will continue.
It is expected that the government may continue to issue 2-3 trillion yuan of special refinancing bonds, the issuance quota of which can come from the difference between the remaining balance of local government debt limits and additional new refinancing bond quotas.
The central bank is also expected to continue providing emergency liquidity financial instruments to provide liquidity support for local governments with heavier debt burdens.
While the debt resolution work is progressing steadily, the fiscal policy led by central fiscal leverage in 2024 will be more proactive.
The central government may continue to issue more government bonds and increase the deficit in the middle of the year to ensure further "strengthening and improving efficiency" of the fiscal policy.
The new quota for local government special bonds is also expected to continue to rise on the basis of 3.8 trillion yuan.
At the same time, when there is still room for "quasi-fiscal" policy to exert its strength, policy banks are very likely to play an important role in 2024, becoming a major supplement to fiscal policy.
At that time, policy banks will focus on supporting infrastructure and urban village renovation.
Assuming that the infrastructure investment growth rate next year will be 9% and the scale of urban village renovation will reach 1.5 trillion yuan, it is estimated that the scale of "quasi-fiscal" tools may exceed 600 billion yuan.