Source: Macro Wen Taosheng
Author: Huang Wentao, Zhang Yican
Core views
On the issue of the deficit rate, the market generally believes that the deficit rate target set by the two conferences is somewhat rigid. Even under the impact of the 2022 epidemic, the deficit rate target has not been adjusted. However, from the perspective of long-term debt resolution and central and local debt, it is necessary for the central government to take the initiative to assume certain responsibilities for increasing leverage. This year's mid-year adjustments have broadened the space for subsequent fiscal policy formulation and freed up ideas. The benefits of water conservancy projects are now, and the benefits are in the future. The “project+funding” for disaster relief and disaster prevention infrastructure is ready to go. It is expected that next year and the next year will be the main year for the formation of physical workload, and the growth center of infrastructure investment is expected to increase next year.
summary
The situation from 25 years ago is “reproduced today”, and the spatio-temporal similarity verifies the rationality of fiscal expansion
Historically, China adjusted its mid-year deficit for three consecutive years from 1998 to 2000, but now after a lapse of 25 years, the situation of 98 is “reappearing today.” In 1998, the Federal Reserve continued to raise interest rates, and the Asian financial crisis broke out. Many East Asian countries faced a trifecta of stock and debt remittances. The massive flood disaster in 1998 had a huge impact on China's economic operation. Immediately in the middle of that year, China began large-scale fiscal policy hedging.
On the issue of the deficit rate, the market generally believes that the deficit rate target set by the two conferences is somewhat rigid. Even under the impact of the 2022 epidemic, the deficit rate target has not been adjusted. Instead, it uses extrabudgetary tools and fund release to obtain incremental capital.
From the perspective of long-term debt resolution and central and local debt, it is necessary for the central government to take the initiative to assume certain responsibilities for increasing leverage. This year's mid-year adjustments have broadened the space for subsequent fiscal policy formulation and freed up ideas. From a short-term perspective, there will be a lot of pressure on the supply of bonds before the end of the year.It is expected that monetary policy follow-up will be needed to ease liquidity constraints in the future.An additional deficit before the end of the year requires the issuance of 500 billion yuan of treasury bonds. This means that by the end of the year, there will be a supply of nearly trillion yuan of new bonds, and the requirement for sufficient liquidity is high.
Achievements are now, benefits are in the future, and “projects+funds” for disaster relief and disaster prevention infrastructure are ready to goIn recent years, global climate change has become increasingly severe, and the El Niño phenomenon has been frequent, posing a challenge to China's economic development and production safety. However, water conservancy engineering has always been an important component in the field of infrastructure investment. It has the characteristics of large investment scale, many public benefits, and strong industrial chain driving effects.
Looking at the capital side, this year's infrastructure capital supply declined year on year, and new treasury bonds will provide incremental capital supply for the end of the year and next year. The decline in infrastructure capital supply corresponds to the lagging decline in the growth rate of infrastructure investment. If there is no incremental capital supply before the end of the year, the downward pressure at the center of the infrastructure investment growth rate next year will be greater. Currently, due to the gradual arrival of more new projects and funds, it is expected that next year and the next year will be the main year for the physical workload to be formed.The growth rate of infrastructure investment is expected to increase next year.
main text
1. After many years, the mid-year adjustment deficit was reproduced, and a large-scale fiscal expansion model began
On October 24, the 6th session of the Standing Committee of the 14th National People's Congress voted to pass the resolution of the Standing Committee of the National People's Congress approving the State Council's issuance of additional treasury bonds and the 2023 central budget adjustment plan, making it clear that the central government will issue an additional 1 trillion yuan in 2023 treasury bonds in the fourth quarter of this year to support post-disaster recovery and reconstruction and enhance disaster prevention, mitigation and relief capabilities.
(1) The situation from 25 years ago is “reproduced today”, and the spatio-temporal similarity verifies the rationality of fiscal expansion
Historically, China adjusted its mid-year deficit for three consecutive years from 1998 to 2000, but now after a lapse of 25 years, the situation of 98 is “reappearing today.” In 1998, the Federal Reserve continued to raise interest rates, and the Asian financial crisis broke out. Many East Asian countries faced a trifecta of stock and debt remittances. The massive flood disaster in 1998 had a huge impact on China's economic operation. Immediately in the middle of that year, China began large-scale fiscal policy hedging.
In mid-1998, China raised its deficit by 108 billion yuan in the middle of the year (50 billion yuan for the central government and 58 billion yuan for the region).Targeted for construction expenses such as flood prevention, flood control, farmland irrigation, railways, key airports, post and telecommunications, urban infrastructure, environmental protection, urban and rural power grid construction and renovation, soil and water conservation in the middle and upper reaches of the Yellow River in the Yangtze River, afforestation and grass planting, grain warehouses, and facilities for public prosecution and administration of justice departments.
In August 1999, China raised its deficit by 60 billion yuan in the middle of the year (30 billion yuan each for the central government and local authorities).Technological transformation for key industries. Major projects include equipment localization and high-tech industrialization, environmental protection and ecological construction, science and education infrastructure, etc.
In April 2000, China continued to raise its deficit by 50 billion yuan in the middle of the year (all in the central deficit).It is used for water conservancy and ecological project construction, education facility construction, transportation and other infrastructure project construction, enterprise technological transformation, and urban environmental protection project construction.
In addition to this, the Ministry of Finance has also issued 100 billion yuan of long-term construction treasury bonds to invest in infrastructure for continued national economic and social development. At the same time, it has issued 270 billion yuan of long-term special treasury bonds to the four major wholly state-owned commercial banks to raise funds to supplement the capital of wholly state-owned commercial banks. The sharp expansion of finance has guided the expansion of the real economy and the financial sector. Although today's spatial and temporal backgrounds are not all the same, the downward pressure on the economy is all strong, and drastic fiscal expansion has become an important means of breaking the current policy situation.
On the issue of the deficit rate, the market generally believes that the deficit rate target set by the two conferences is somewhat rigid. Even under the impact of the 2022 epidemic, the deficit rate target has not been adjusted. Instead, it uses extrabudgetary tools and fund release to obtain incremental capital.
Entering 2023, since the implementation of the fiscal revenue budget for 2022 is lower than expected, the completion of the general public budget in 2022 in the broad sense of finance is expected to be less than 100%. It is unrealistic to expect large New Year's Eve funds to be carried forward. The reduction of other liabilities on the central bank's balance sheet to a low point means that profit margins that can be paid in 2023 will be compressed simultaneously.In 2023, the financial resources that can be used for turnover were already being gradually reduced, yet during the year they faced multiple pressures such as settlement of hidden debt, steady growth, disaster prevention and mitigation, etc., and the tight balance problem faced by finance was quite serious.
Seen from a medium- to long-term perspective, breaking the 3% deficit rate constraint is a dynamic policy adjustment after reviewing the current situation. After the outbreak of the epidemic in 2020, the fiscal expansion model began. “Central deficits under deficit rate suppression plus ever-expanding government funds” became the main characteristic of debt expansion. However, in the context of poor real estate investment, revenue from state-owned land concessions declined sharply, and government fund revenue for the first three quarters of this year only reached 48.1% of the annual budget. Self-balancing of government fund accounts has become increasingly difficult.
Therefore, from the perspective of resolving long-term debt and playing a game of chess with central and local debt, it is necessary for the central government to take the initiative to assume certain responsibilities for increasing leverage. This year's mid-year adjustments have broadened the space for subsequent fiscal policy formulation and freed up ideas.
From a short-term perspective, there will be a lot of pressure on bond supply before the end of the year, and it is expected that monetary policy follow-up will be needed to ease liquidity constraints in the future.Judging from the current bond issuance plan, special special bonds, and new treasury bonds are all facing a peak in issuance.
As of October 24, 24 provinces have disclosed special refinancing bond issuance plans, with a total scale of 1012.719 billion yuan, of which the issuance scale is 736.294 billion yuan; as of mid-October, about 3.5 trillion yuan of additional special bonds have been issued, leaving about 300 billion yuan to be issued; and the new deficit requires the issuance of 500 billion yuan of treasury bonds before the end of the year, which means that by the end of the year, there is a high demand for sufficient liquidity.
2. Achievements are in the present, benefits in the future, and “projects+funds” for disaster relief and disaster prevention infrastructure are ready to go
(1) Global climate change is becoming more intense, demand for disaster prevention and mitigation continues to rise, and infrastructure development efforts plan ahead
In recent years, global climate change has become increasingly severe, and the El Niño phenomenon has been frequent, posing a challenge to China's economic development and production safety.In the first three quarters, the natural disaster situation in China was complex and severe. It was mainly floods, droughts, typhoons, wind and hail, and geological disasters. Low-temperature freezing, snow disasters, earthquakes, sandstorms, and forest and grassland fires also occurred to varying degrees.
As a result of various natural disasters, a total of 8.9118 million people were affected to varying degrees, 499 people died and disappeared as a result of the disaster, and 2,751 million were urgently relocated and resettled; 118,000 houses collapsed, 422,000 were seriously damaged, and 1,035,000 were generally damaged; the area affected by crops was 9714.8 million hectares; direct economic losses amounting to 308.29 billion yuan. It can be seen that in the past five years, the pressure faced by China for disaster relief, prevention and mitigation has continued to increase.
According to the Ministry of Finance, the additional $1 trillion will focus on eight major areas:Post-disaster rehabilitation and reconstruction, key flood control projects, natural disaster emergency response capacity improvement projects, other key flood control projects, irrigation area construction and renovation and key soil erosion control projects, actions to improve urban drainage and flood prevention capacity, key natural disaster comprehensive prevention and control system construction projects, and high-standard farmland construction in the Northeast region and Beijing-Tianjin-Hebei disaster-stricken areas. It is expected that while supporting post-disaster recovery and reconstruction and safeguarding people's livelihood, the new funding will also continue to strengthen long-term capacity building to withstand natural disasters, which is conducive to promoting high-quality development.
(2) To solve the problem of insufficient infrastructure capital and projects, the central growth rate of infrastructure investment is expected to stabilize next year
Looking at the project side, investment in major projects this year is still in a negative year-on-year growth range.The total investment amount for special debt projects and the progress of bond issuance since this year are not very advanced. The cumulative year-on-year growth rate of investment in major projects in January-September is still negative. It is expected that some new debt limits in 2024 will be issued in the fourth quarter, giving full play to the effects of stable investment growth in bond funds.
Looking at the capital side, this year's infrastructure capital supply declined year on year, and new treasury bonds will provide incremental capital supply for the end of the year and next year.The decline in infrastructure capital supply corresponds to the lagging decline in the growth rate of infrastructure investment. If there is no incremental capital supply before the end of the year, the downward pressure at the center of the infrastructure investment growth rate next year will be greater. Currently, due to the gradual arrival of more new projects and funds, it is expected that next year and the next year will be the main year for the physical workload to be formed.The growth rate of infrastructure investment is expected to increase next year.
(3) The increasing importance of disaster prevention and mitigation in water conservancy projects will become the main investment area for infrastructure this year and next
Water conservancy engineering has always been an important component of infrastructure investment. It has the characteristics of large investment scale, many public benefits, and strong industrial chain driving effects.In recent years, water conservancy investment, as an important project category with steady growth in infrastructure, has driven investment in many major projects. The country completed investment of 1089.3 billion yuan in water conservancy construction in 2022, an increase of 44% over 2021. It is the year with the highest investment in water conservancy construction in China's history, making an important contribution to stabilizing the macroeconomic market and promoting economic stability and improvement.
From a financing perspective, a total of 1156.4 billion yuan was invested in water conservancy construction in 2022, of which 203.6 billion yuan of local government special bonds and 32.4 billion yuan of financial credit and social capital were used to strongly guarantee the capital requirements for large-scale water conservancy construction. Since this year, the Ministry of Water Resources has focused on promoting 60 major water conservancy projects, mainly in four categories: improving the watershed flood control engineering system, speeding up the construction of a national water network, ensuring food security, and promoting smart water conservancy construction.
In addition to major water conservancy projects such as flood control and irrigation, urban drainage and waterproofing capacity is also within the scope of projects covered by new treasury bonds. “National large-scale projects+regional small projects” are expected to become a structural characteristic of large-scale water conservancy investment. With large-scale supply of capital, investment in water conservancy projects this year and next will be an important driving force for infrastructure investment.
Risk warning:
There is still uncertainty about the sustainability of the recovery in consumption. Since this year, consumer consumption has begun to pick up, but the level of recovery is limited. If it continues to fluctuate at a low level in the future, it will still be possible to continue to move closer to a normalized growth rate, and close tracking is still needed. If consumption continues to be weak, the economic recovery momentum will be limited.
Whether the real estate industry can continue to improve remains uncertain. The current downturn in real estate has continued for a long time. Currently, there is a brief recovery trend, but many indicators are still showing negative growth, and it remains to be seen whether the recovery trend can be maintained in the future.
The impact of tight monetary policies in Europe and the US may exceed expectations, dragging down global economic growth and asset price performance.
The geopolitical conflict remains uncertain, disrupting global economic growth prospects and market risk appetite.
editor/tolk