Expectations are growing China could super-size its stimulus package when it votes on the budget next week, especially since the draft currently being considered already foresees a record-breaking fiscal deficit for the country in 2009 of some 950bn yuan (higher than previously expected).
Standard Chartered picks up on the point in one of its most recent reports (our emphasis):
It is possible that Beijing will super-size its official fiscal stimulus package next week. Our understanding is that the government budget includes CNY 600bn (USD 88bn) committed by the National Development and Reform Commission (NDRC) and the MoF (Ministry of Finance) for 2009 fiscal stimulus-related investments. This CNY 600bn is the central government’s share of two years of CNY 2trn in investment spending (to total CNY 4trn). However, this is only the minimum –many additional projects will get the NDRC’s approval but will not get central government financing. If local governments can finance them, then they will go ahead. Our working estimate is that this turns China’s CNY 4trn stimulus programme into a CNY 5-6trn programme.
Ok, so a nice increase to the stimulus plan from additional local government-financed projects. But wait, there’s more. According to Standard Chartered the effective stimulus package could end up even bigger still. As they explain:
However, officials we spoke to in Beijing last week suggested that CNY 8-10trn (USD 1-1.5trn) of government-sponsored investment over two years was possible, if not likely. Formalising this headline number would obviously be a boon to sentiment, so a formal announcement at the National People’s Congress next week is entirely possible. If this is really the measure of the government’s ambition, then the government’s (still unofficial) 8% GDP growth target for 2009 will be met with ease.
What’s more, Standard Chartered says a super-sized fiscal package would not necessarily have to entail any additional central government support. As they explain:
Central government financing (one-quarter of the CNY 4trn package) is a mix of direct grants and interest-rate subsidies. Only in the case of a strategic central government-sponsored project does the NDRC-MoF inject all of the registered capital. For most projects, the central government only injects a small part of the capital; the more commercial the project, the more likely that it will only offer interest rate subsidies. As a result, most ‘fiscal’ projects also require local governments to inject equity (30-40% of total project investment) and seek bank financing (or in some cases, private participation) for the rest.
So the pressure on local governments to come up with financing will only increase when we move to a CNY 8trn+ package. At present, local governments reportedly face a CNY 300bn (USD 44bn) annual ‘funding gap’ for their share of the CNY 4trn package. That will obviously increase when we go for a super-sized package.
How would local authorities manage to raise that much money? According to the bank they have three possible options:
1) Local government bond issues.
2) Land sales.
3) Medium-term-note issues by city investment companies (chengtou) for infrastructure projects authorised by the NDRC.
On a side note - Standard Chartered explain that while local governments are traditionally not allowed to raise debt directly — and have so far failed to convince Beijing of their need to do so — they have recently won a compromise. The authorities have now reportedly signed off on 200bn yuan ($29bn) worth of local government bonds to be issued this year.
Related links:
China’s fiscal deficit to hit record high in 2009: report - AFP
Chinese liquidity and stocks go boom - FT Alphaville
