China should issue at least 10 trillion yuan (US$1.4 trillion) worth of long-term special treasury bonds to boost consumption and help local governments to pay off debt owed to the private sector, a leading Chinese economist said.
The suggestion from Mao Zhenhua, co-director of Renmin University’s Institute of Economic Research, came as analysts widely expect Beijing to come up with a fiscal stimulus package following a raft of interest rate cuts and monetary policy easing last week, which had sparked a rally in the Chinese stock market.
Mao said China should consider issuing additional long-term treasury bonds of a significant size – a move that would lift its official fiscal deficit ratio of 3 per cent of its gross domestic product this year.
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“For example, we should be considering at least 10 trillion yuan,” said Mao, who is also the founder of the China Chengxin Credit Rating Group.
“I think it needs to be sizeable for it to be effective to lift the economy and maintain the positive environment following the monetary policy easing [by the central bank].”
Mao suggested that the proceeds from the long-term treasury bonds could be channelled to subsidising household spending in the form of consumption vouchers and to repay some of the money owed to the private sector to improve local governments’ credit records.
Tax reductions for businesses should also be considered, Mao added, while some of the proceeds from the long-term treasury bonds could be allocated to local governments to cover revenue lost due to tax cuts.
An austerity drive and declining revenues from land sales in China have triggered concerns that some cash-strapped local governments and state firms are not paying contractors and suppliers, many of which are small and medium-sized companies, despite calls from the central government to clear overdue payments to the private sector.
In 2024, the size of interest payments on local government debt, including local government bonds and interest-bearing debt by local government financial vehicles (LGFVs), would exceed 4 trillion yuan (US$586 billion), accounting for more than 20 per cent of local fiscal revenues, according to an estimate by Yuan Haixia, a senior researcher at China Chengxin International.
LGFVs are hybrid entities that are both public and corporate, and were created to skirt restrictions on local government borrowing, with much of the funds spent on infrastructure.
Mao said that economic benefits, such as employment created by infrastructure spending from local governments, have been increasingly marginal.
“I don’t think it’s necessary to use the proceeds from the new bonds to fund infrastructure projects to drive economic growth,” said Mao, who has advocated for the transfer of government income to households and the optimisation of local government debt structures, with the central government taking on some of the local debt.
“Currently, the stock market is performing well. But to benefit households and businesses, fiscal policy changes would need to be much more effective.”
While Chinese academics and policy advisers agree that Beijing needs to expand its fiscal policy to meet its “around 5 per cent” gross domestic product growth target for 2024, opinions are split on whether the additional funds from treasury bonds should be transferred to consumers or infrastructure projects.
At the Tsinghua PBCSF Chief Economists Forum on Saturday, former People’s Bank of China adviser Yu Yongding said infrastructure remained a viable option to steady economic growth, given the declining investment in property.
Lu Ting, chief China economist at investment bank Nomura, told the same forum that infrastructure spending should be targeted at improving efficiency, while some funding could go to the middle- and low-income groups.
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