China’s Shanghai Composite Stock Index today ($CHSC) recovered from a 3-1/2 year low and closed slightly higher after Bloomberg reported that China is considering additional stimulus by issuing 1 trillion yuan ($139 billion) of new debt in special sovereign bonds. The sale of such bonds is only the fourth such sale in the past 26 years as Chinese authorities seek more funds to finance efforts to revive economic growth.
Bloomberg reported that the plan discussed by senior Chinese policymakers would include the sale of long-term sovereign bonds to fund projects related to food, energy, supply chains, and urbanization. Such sales of bonds are rare. In 1998, China issued ultra-long sovereign bonds in the aftermath of the Asian Financial crisis to replenish capital for major state-owned banks. The most recent sale of long-term sovereign bonds was in 2020, when Chinese authorities issued 1 trillion yuan of sovereign bonds to pay for pandemic response measures.
These new stimulus measures by Chinese President Xi Jinping’s government are the latest attempt to support an economy that is struggling to maintain momentum. China’s ongoing property crisis, deflation concerns, and weak domestic demand are weighing on economic activity and depressing market confidence. The new stimulus measure also shifts spending responsibility to the central government from debt-laden local Chinese governments that have struggled to fund various stimulus measures.
The design of long-term sovereign bonds means they are intended to be repaid over several decades, lowering the pressure on the government to make payments in the short term. In a research note, Goldman Sachs said the ultra-long bonds still “may not be able to address all the fiscal challenges,” but the issuance of such debt is a “likely toolkit” for fiscal easing this year. In October 2023, China’s legislature approved a plan to raise the fiscal deficit ratio for 2023 to about 3.8% of gross domestic product, well above the 3% set last March. That plan included issuing additional sovereign debt worth 1 trillion yuan in Q4 to support disaster relief and construction.
China’s budget deficit in 2023 ballooned to 8.7 trillion yuan, which included the extra 1 trillion yuan of debt announced in October. China’s Finance Minister Lan Fo’an said China’s debt ratio is in a “reasonable range” and that officials have been “appropriately expanding spending and meeting realistic needs while saving room for tackling potential risks and challenges in the future.” However, even with this new stimulus, markets may be disappointed after Chinese Premier Li shot down the prospects of larger stimulus today, saying, “In promoting economic development, we did not resort to massive stimulus.”
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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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