BEIJING — In a bid to tackle a significant economic slowdown, China’s Ministry of Finance announced plans to increase borrowing aimed at supporting cash-strapped local governments and enhancing the financial stability of state-owned banks. This move comes in response to declining consumer confidence and a struggling real estate market.
Finance Minister Lan Fo’an revealed that while specific figures regarding additional borrowing and spending were not disclosed, the government is committed to implementing measures to revive domestic consumption and stabilize the real estate sector. “After due procedures, we will release the number to society,” he stated, hinting that detailed plans are still being formulated.
This announcement follows a series of economic stimulus measures introduced last month, which initially boosted Chinese stocks but saw declines recently as investor confidence waned regarding the sufficiency of government interventions.
Both Lan and Deputy Finance Minister Liao Min highlighted the intention to inject capital into major banks, which would enable them to absorb losses and maintain lending crucial for economic growth. Investors are wary, as many banks have suffered substantial losses from loans linked to the beleaguered housing market, although official admissions of these losses remain minimal.
Lan emphasized the need for local governments to generate revenue through asset sales. Over the last three decades, many municipalities have invested heavily in infrastructure, constructing office buildings, hotels, and convention centers. However, with plummeting real estate prices, local authorities have been hesitant to sell these assets at a significant loss. The finance minister also promised to investigate how local governments have utilized their funds, amid concerns of mismanagement contributing to financial difficulties.
Alicia Garcia-Herrero, the chief economist for Asia at Natixis, noted that the absence of specific fiscal stimulus figures was disappointing but recognized a favorable tone in the government’s commitment to support the economy. “They really want to show they are trying to rebalance the growth model, and that may take longer,” she explained.
Despite mounting debts at local and provincial levels, the finance ministry has traditionally resisted expanding the national budget deficit. However, the suggestion by Jia Kang, a prominent former finance ministry official, to borrow up to $1.4 trillion for additional bond sales marked a significant departure from this stance. This funding could support essential infrastructure projects and assist local governments in meeting their financial obligations.
In late September, the central bank and financial regulators introduced measures to promote bank lending, including interest rate reductions, following directives from the ruling Communist Party Politburo for further economic action.
As localities grapple with declining consumer spending, visible in empty restaurants and decreasing hotel occupancy rates, the need for robust economic measures has become increasingly urgent. With many families witnessing a significant loss of wealth due to falling real estate prices—down by a third or more in various cities—consumer behavior has shifted towards frugality, impacting luxury goods sales sharply.
Confidence among consumers, which plummeted during Shanghai’s stringent two-month Covid-19 lockdown in spring 2022, remains at historically low levels. The latest consumer confidence index, shared online by the government on September 29, indicated a decline in economic optimism that had not been seen since 1990, except during the severe conditions of November 2022.
The recent fluctuation in the CSI 300 index—an index tracking large companies listed in Shanghai and Shenzhen—illustrates the market’s volatility, rising by 27 percent after the government’s initial stimulus announcements before dropping 8.7 percent in subsequent days.
To navigate these financial challenges, the finance ministry plans to facilitate the early issuance of debt, which can be allocated for immediate local government expenditures, including salaries for civil servants. Traditionally, local governments relied on land sales to developers for revenue; however, the ongoing real estate downturn has severely restricted this income source.
As China aims to address these multifaceted economic challenges, the implications of increased borrowing on local and national economies will be closely scrutinized in the coming months.
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