• News
• 2024-08-09

Fiscal Policy Focuses on Risk Prevention, Benefiting Urban Investment Bonds and Stock Market Volatility Continues

The much-anticipated Ministry of Finance press conference, widely interpreted by major domestic and international institutions, established a stance of large-scale fiscal support but did not reach the level of "strong stimulus," with risk prevention remaining at the core.

On October 12th, the State Council's Information Office held a press conference where officials from the Ministry of Finance introduced the incremental fiscal policies for the coming period. These primarily included clarifying that the central finance has significant room for increased borrowing and deficit expansion; proposing a one-time increase in the debt limit on a large scale to replace the existing implicit debt of local governments; adjusting and optimizing the use of special bonds, including their potential use for land reserves and the acquisition of existing housing stock; and issuing special treasury bonds to support large state-owned commercial banks in replenishing their core Tier 1 capital.

Lack of Surprises but No Market Disappointment

"The market may think that this press conference did not bring them too many surprises, but it also did not disappoint them," said Lu Ting, Chief Economist of Nomura China.

The reason for the lack of surprises is that the press conference barely announced any specific content regarding additional budgets and bond quotas, as these measures require approval by the National People's Congress or its Standing Committee. Institutions expect an additional budget of 1 to 2 trillion yuan to be announced at the end of October to support consumption and local finances.

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Consistent with market expectations, the Ministry of Finance did indeed allow local governments to use 400 billion yuan of unused bond quotas, which were carried over from previous years and do not require additional approval from the National People's Congress. These quotas are used to cover part of the fiscal revenue gap. At the same time, the Ministry of Finance also mentioned the possibility of allowing more issuance of central and local government bonds to help local governments replace a large amount of implicit debt, as well as to replenish the capital of state-owned banks.

"What's more important is that the Ministry of Finance acknowledged that fiscal revenue is lower than expected, promised to achieve fiscal targets this year, and firmly stated that it will introduce more counter-cyclical fiscal measures. It also emphasized that the central government still has a lot of room for borrowing and can increase the deficit as a percentage of GDP," Lu Ting said.

In other reports, during his visit to Shanxi and Shaanxi provinces from October 10th to 12th, Vice Premier He Lifeng emphasized the importance of the real estate market and regarded it as the "weathervane" of the current macro economy. He reiterated his commitment to efforts to ensure delivery and significantly expand the coverage of "white list" projects.

S&P Global Ratings stated that the key to whether the policy can stabilize the real estate industry lies in the method, scale, and target of the allocation of these incremental fiscal funds.

In fact, similar policies have been introduced before, but the implementation results were not very satisfactory. The aforementioned institution believes that the reasons are, first, the overall scale is not large, with the previous phase of 300 to 500 billion yuan of reserve scale being a drop in the bucket compared to the overall inventory scale; second, the conditions for purchasing inventory commercial housing are strict, and according to the information disclosed by many cities, they basically require the sale of the entire project or the whole building, and some areas also require the project to have good supporting facilities, convenient transportation, and superior geographical location, with the purchase price also being low, resulting in developers being unable to participate.Therefore, if the relevant fiscal policies this time can be based on the principle of supporting the market bottom, and allocate funds under conditions that facilitate the participation of market entities, benefiting a wider range of market-oriented real estate development entities, it will more effectively promote the realization of the "stabilization" goal.

Debt market is worry-free, and urban investment is good news.

Debt resolution is undoubtedly the biggest highlight of this press conference, and previous debt resolution has driven the bond market.

A bond investment manager of a joint-stock bank's wealth management subsidiary told reporters that the idea of hidden debt replacement seems to have returned to 2015-2018 - in addition to continuing to arrange a certain scale of bonds in the newly added special debt limit every year to support the resolution of existing government investment project debts, it is proposed to increase the debt limit by a large scale at one time to replace the existing hidden debt of local governments, and to increase efforts to support local governments in resolving debt risks. The relevant policies will be detailed to the public after going through the legal procedures.

"The scale of hidden debt has been reduced by 50% compared to 2018, and it is estimated that the remaining 50% will not be digested all at once, but will continue, but the overall scale is estimated to exceed one trillion yuan," the person said.

The Minister of Finance, Lan Fo'an, mentioned that this policy, which is about to be implemented, is the most supportive debt resolution measure introduced in recent years. This is undoubtedly a timely policy rain, which will greatly reduce the pressure of local debt resolution, free up more resources for economic development, boost the confidence of business entities, and consolidate the grassroots "three guarantees".

Wang Lei, director of the Industrial and Commercial Enterprise Rating Department of S&P Xinping, told reporters that it is expected that the risk of urban investment debt will further converge, and policies are also beneficial for the tail-end regions of urban investment and non-standard debts. Since the "package" debt resolution plan was proposed at the Political Bureau meeting in July 2023, various regions have introduced measures to orderly promote debt resolution, and debt resolution has achieved certain phased results. The overall spread of urban investment bonds has shown a downward trend, and local government hidden debt has been reduced by half compared to the end of 2018.

"Replacing local government existing hidden debt with a large-scale debt limit will promote the adjustment of local debt structure. Urban investment enterprises can obtain more debt replacement funds to alleviate liquidity pressure. Tail-end urban investment enterprises may benefit more obviously, and the pressure of debt maturity may be further alleviated," Wang Lei said. Institutions believe that measures such as local debt and bank credit replacement may also benefit non-standard debts.

In terms of the overall bond market, the above wealth management personnel believe that the domestic market is still in a interest rate reduction cycle, and the sales data of new real estate houses are still weak, and the actual risk of the bond market is controllable. With the gradual stability of wealth management and fund liabilities, and banks gradually reducing deposit interest rates, it is expected that liquidity will become looser, and the certainty of short-term interest rates falling is high. The investment strategy is to select cost-effective credit bonds, especially urban investment individual bonds, and speed up the configuration rhythm when there is an adjustment.

It is expected to continue to fluctuate after the "crazy bull" brakes.For the stock market, several institutional investment research professionals interviewed by journalists believe that after this press conference, the adjustment driven by expected sentiment may come to an end. However, considering the significant short-term decline, it is difficult for market sentiment to recover quickly, and it is expected to continue a trend of fluctuating consolidation. Institutions continue to favor dividend assets that can both attack and defend. Real estate ETFs are once again seen as short-term trading varieties, while the medium and long-term trend will still return to fundamentals, and it is necessary to pay attention to the actual economic stimulus effects of future policies.

Stimulated by the strong market stabilization signals at the end of September, by the end of the National Day holiday, the MSCI China Index and the CSI 300 Index have rebounded by 36% and 27% respectively from their September lows, shocking the international market. However, after the holiday, market sentiment changed drastically. On October 8th, A-shares opened with a daily limit, and then the "crazy bull" fell into a fluctuation. The Shanghai Composite Index retreated from 3,674 points to 3,203.5 points at the close on October 11th.

Morgan Stanley's Chief Equity Strategist for China, Wang Ying, mentioned at the latest customer meeting that before this round of pullback, the valuation of the MSCI China Index quickly recovered from 9 times to 12 times at the time of the "pandemic restart trade," fully recovering to the average of the past 5 years, even slightly exceeding it. However, profits have not improved, so further rebound must rely on further support from fiscal policy, especially the improvement of the economic fundamentals and price situation, the stabilization of the real estate market's volume and price, and the transmission to the recovery of corporate profits.

UBS recently stated that from a medium-term perspective of half a year, the market's continued upward movement requires the support of corporate profits. The profits of all A-shares fell by 3% year-on-year in the first half of 2024. The profits of industrial enterprises in July and August grew by 4.1% and -17.8% year-on-year, respectively, showing that corporate profits in the second half of the year are still at the bottom of the consolidation. The policy easing that has been implemented since late September and its transmission to the real economy and corporate profits require a certain amount of time. If the economic fundamentals gradually improve and profits rise with the trend, the upward space of the A-share market may be further opened up.