China to Raise 6 Trillion Yuan in Special Treasury Bonds

By Kevin Yao and Liangping Gao

BEIJING (Reuters) – China may raise an additional 6 trillion yuan ($850 billion) from special treasury bonds over three years to stimulate a sagging economy, local media reported. This figure, however, failed to revive sentiment in the country's stock market.

The Caixin Global report cited sources with knowledge of the matter, coming after Finance Minister Lan Foan announced on Saturday that Beijing will "significantly increase" debt, although the lack of details on the size and timing of the fiscal measures disappointed some investors.

The anticipated fiscal package has been the subject of intense speculation in financial markets. Chinese shares had reached two-year highs earlier this month on news of the stimulus but retreated in the absence of official details.

On Tuesday, stocks dipped about 0.3%, suggesting little excitement among investors regarding the reported amount. Analysts believe it will at least stabilize growth in the near term.

"This is in line with our expectations," said Xing Zhaopeng, ANZ's senior China strategist. "For next year, we still think a growth target of around 5% is likely to be maintained. So, for a 5% growth rate, that should be enough."

Reuters reported last month that China planned to issue special sovereign bonds worth about 2 trillion yuan ($285 billion) this year as part of fresh fiscal stimulus.

Data from recent months, including Monday's trade and new lending figures for September, missed expectations, raising concerns that China may not reach this year's 5% growth target and may struggle against deflationary pressures.

Economic growth is expected to slow to 4.5% in the third quarter from 4.7% in the second, potentially rebounding to 4.8% for the whole year due to stimulus, according to a Reuters poll on Tuesday.

In late September, authorities launched monetary stimulus and property sector support measures. Afterward, leaders of the Politburo pledged "necessary spending" to restore growth.

"The probability of reaching a growth rate of about 5% at least in 2024 and 2025 would increase a lot," said Bruce Pang, chief China economist at Jones Lang LaSalle, regarding the reported 6 trillion figure.

The Caixin article cited that the funds would partly be used to help local governments address their off-the-books debts. This reported amount is nearly 5% of China's economic output.

The International Monetary Fund estimates central government debt at 24% of economic output. However, they calculate overall public debt, including that of local governments, at about $16 trillion, or 116% of GDP.

"Unless the central government voluntarily increases leverage, investment will remain weak, as local governments are burdened with heavy debt and corporate balance sheets are deteriorating due to a weak economy," said Xia Haojie, bond analyst at Guosen Futures.

'Challenging Task'

A severe downturn in the property sector since 2021 has reduced local government revenues, as a large portion of their income relied on auctioning land to real estate developers.

The property crisis has negatively impacted consumer and business activity, exposing China's overreliance on external markets and government-led, debt-driven investment in infrastructure and manufacturing.

Low wages, high youth unemployment, and a weak social safety net mean China's household spending is under 40% of annual economic output, approximately 20 percentage points below the global average. In contrast, investment is 20 points above average.

Thus, China contributes significantly more to the global economy as a producer than as a consumer, leading to trade tensions with the United States, Europe, and several emerging markets. U.S. presidential candidate Donald Trump has proposed 60% tariffs on all Chinese goods if he wins next month's election.

These imbalances raise concerns about China's long-term growth potential, regardless of the immediate fiscal stimulus.

"Consistently achieving 5% growth over the next few years will remain a challenging task, especially if China encounters a less supportive external demand situation," said Lynn Song, ING's greater China chief economist.

The finance ministry noted that the impending fiscal stimulus would provide subsidies to low-income households, assist indebted local governments and the property market, and replenish state banks' capital.

Remaining details are expected at a meeting of the Standing Committee of the National People's Congress, China's top legislative body, likely in the coming weeks.

($1 = 7.0870 yuan)