China – Better budget implementation may create short-term boost

Before the week-long National Day holiday, the PBoC announced a policy mix to support the economy. The package included reductions in the reserve requirement ratios (RRRs) for banks and the 7-day reverse repo rate (now the main policy rate). The central bank also lowered the interest rates on outstanding mortgage loans, provided more support for state-owned enterprises (SOEs) to acquire unsold homes from property developers to support the housing market, and set up stock stabilization funds. We wrote about these in an earlier Economic Briefing .

China’s Politburo, which consists of the top 24 leaders of the country, also announced a number of pledges to support the economy and the property sector before the holiday. The Chinese leadership gave the strongest vow thus far since the property downturn and some unusual but forceful languages about fiscal and monetary implementations. This suggests that the leadership senses the urgency and at the same time wants to improve its communication to the markets.

Focus on the implementation of current budget

Following the holiday, the government promised more support for the property sector and indebted local government. The finance ministry said China has CNY2.3 trillion (USD325 or 1.8% of China’s annual GDP) in local government special bonds funds available for the rest of this year. This is not new money but idle cash waiting to be used. Local governments have been falling behind on budgeted spending due to the fall in tax revenues, and also the fact that it is getting harder to find projects that are profitable which is currently required by the central government. That is, despite a larger budget deficit that has been announced earlier this year.

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