Beijing will offer fresh stimulus through a rare budget adjustment and increased sovereign debt

• China approved a plan to adjust its budget and issue more sovereign debt, according to a report by Bloomberg.

• Sources told Reuters that around $137 billion in debt could be issued, and the budget deficit for 2024 may be increased.

• This move aims to relieve local governments of their debt burden and stimulate the economy in the coming year.

Chinese authorities have granted approval for additional sovereign debt and amendments to the state budget for 2023, in order to provide extra stimulus for the country’s struggling economy, as reported by Bloomberg.

While the details of the plan have not been disclosed, sources informed Reuters that China is set to approve approximately $137 billion in sovereign debt issuance. Furthermore, government advisors are advocating for an increase in the 2024 budget deficit beyond the usual 3% of GDP. By doing so, it would allow for the issuance of more government debt, which in turn would help revive the economy.

Beijing rarely makes mid-year adjustments to its budget, as past instances only occurred during periods of strain such as the 2008 crash and the 1990s Asian financial crisis.

Although China demonstrated surprising strength in the third quarter, these measures are intended to bolster growth heading into the next year. Economists predict that growth will slow to 4.5% in 2024, and challenges will persist.

China has already been hit hard by a plummeting property market, and lackluster spending and productivity trends have dashed this year’s economic prospects. Capital flight from the nation’s markets has been rampant.

The focus on sovereign bonds could indicate a changing policy approach, with the national government taking on more of the debt burden instead of local authorities. Debt levels among regional governments have become a major issue, particularly as their finances largely rely on China’s crumbling real-estate sector.

According to Reuters, the central government has a debt-to-GDP ratio of 21%, while local governments’ ratio is much higher at 76%.

However, while Beijing’s shift towards stimulus marks a departure from the state’s long-standing opposition to increased debt, it may not be a sufficient solution, according to sources cited by the outlet.

Story continues

Instead, the implementation of structural reforms that encourage increased household spending, reduce reliance on investment, and support private firms should be prioritized.

“We need to make good preparations for next year and implement policies to stabilize growth. The foundation of economic recovery is not solid,” said an anonymous cabinet adviser to Reuters.

Read the original article on Business Insider