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China’s official states issuance of new bonds will aid economic recovery amid rising budget deficit.

China’s New Bonds to Boost Economic Recovery, says Finance Minister

China’s Economic Recovery

China’s vice finance minister, Zhu Zhongming, stated that the issuance of new sovereign bonds will play a crucial role in bolstering the country’s economic recovery. With the government’s increased fiscal stimulus and a significant rise in its budget deficit, these bonds are expected to provide much-needed support.

Investing in Infrastructure

To aid in the recovery efforts from this year’s floods and enhance urban infrastructure for future disasters, China’s top parliament body has approved the issuance of 1 trillion yuan ($137 billion) in sovereign bonds. This investment will not only help rebuild affected areas but also drive domestic demand and further solidify the economy’s recovery.

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Growth Outlook

Despite the challenges posed by the crisis-hit property sector, China’s economy surpassed expectations by experiencing growth in the third quarter. This positive performance improves the likelihood of meeting Beijing’s growth target of approximately 5% by 2023. However, economists remain cautious, as the property sector’s struggles continue to cast a shadow over the overall growth outlook.

Fiscal Stimulus and Debt Concerns

As Beijing prepares to inject additional fiscal stimulus to support the economic recovery, concerns arise regarding the reliance on debt-funded stimulus and its potential impact on transitioning to a consumer-led growth model. Analysts at Nomura downplayed the immediate positive impact of the new debt issuance, emphasizing limited fiscal multiplier effects.

Prudent Bond Issuance

China’s finance minister, Zhu, assured that bond issuance would be paced reasonably and matched with appropriate spending. Measures will also be implemented to prevent the misuse of bond funds. Zhu highlighted that the government’s debt level remains within a reasonable range, although specific details were not disclosed.

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Future Plans

Half of the funds raised through the bond issuance will be allocated this year, while the remaining half will be utilized in the following year. UBS analysts predict that the government will increase the budget deficit and local bond quotas for 2024, along with further interest rate cuts and reductions in bank reserve requirement ratios.

China’s parliament has also approved a bill allowing local governments to front-load a portion of the 2024 local bond quotas. To fund infrastructure projects, local governments were instructed to complete the issuance of the 2023 quota of 3.8 trillion yuan in special local bonds by September.

In conclusion, China’s new sovereign bonds are expected to play a crucial role in supporting the country’s economic recovery. With the issuance of these bonds and increased fiscal stimulus, China aims to drive domestic demand, rebuild affected areas, and enhance urban infrastructure. While concerns exist regarding the reliance on debt-funded stimulus, authorities assure prudent bond issuance and responsible spending. The future holds the potential for increased budget deficits, interest rate cuts, and further reductions in bank reserve requirement ratios to sustain economic growth.

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