While Chinese growth is slipping, Beijing no longer hesitates to open the budgetary and monetary floodgates wide to try to stimulate its battered economy. Between credit easing, early distribution of local borrowing quotas and massive issuance of state bonds, the Middle Kingdom is multiplying unprecedented expansionist measures. Objective: return to vigorous growth in 2024.
Credit easing and anticipation of local borrowing quotas
Faced with the serious slowdown in its growth, China no longer hesitates to activate all the budgetary and monetary levers at its disposal to try to revive its bloodless economy.
Between massive credit easing, early distribution of local borrowing quotas and record issuance of state bonds, Beijing seems ready to take all the risks to return to vigorous growth in 2024. A risky bet when the public deficit is already close to the 5% of GDP, its highest level in three decades.
To believe Bloomberg, China is even preparing to release some 60% of the 2024 quota of local borrowings, or $319 billion, in December 2023. Much earlier than usual.
The idea is simple: by massively injecting liquidity into the coffers of over-indebted provinces from January 2024, the government hopes to stimulate local investments in infrastructure and thus revive the economic machine.
A last-ditch strategy which seems above all to betray the feverishness of the authorities in the face of the continued deterioration of activity. Even if it means worsening the financial dependence of the provinces and the uncontrolled spiral of Chinese public debt. At the risk of directly threatening the economic and financial stability of the country, with potential implications for the BRICS.
Massive issuance of government bonds
In the same vein, China announced on October 25 the launch of government bonds worth 1,000 billion yuan (130 billion euros). Officially to finance the prevention of natural disasters, these massive emissions will in reality serve to boost sluggish growth, which fell to 4.9% in the third quarter compared to 6.3% in the second quarter.
With an already very accommodating monetary policy, China is now banking on fiscal stimulus to regain its pre-pandemic growth rate. If this measure reflects Beijing’s desire to support the economy at all costs, it is not without danger and revives concerns about the sustainability of Chinese debt.
Remember that in 2022, China displayed already its worst budget deficit in three decades at -4.3% of GDP. With this new $319 billion recovery plan, the 2023 deficit now threatens to easily exceed the -5% mark. And this, without even taking into account the abysmal debt of local governments and public companies, carefully excluded from official statistics.
According to several economists, the real Chinese public deficit would easily exceed 15% of GDP. Enough to worry the markets about China’s ability to repay its debts.
In the short term, this fiscal stimulus plan comes at the right time to give a boost to a drained Chinese economy. But in the long term, beware of the devastating effects of an out-of-control public debt, which could well and truly undermine the finances of the Middle Kingdom and cause a global financial earthquake.
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