China relies on state banks for 120 billion dollars to stimulate economy

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Beijing is once again turning to state policy banks to help bail out an economy under pressure, ordering them to provide 800 billion yuan ($120 billion) in financing for infrastructure projects.

The stimulus, announced at a meeting of the State Council chaired by Prime Minister Li Keqiang, could help fund a significant portion of infrastructure costs this year and provide some relief to local governments struggling with declining revenues.

President Xi Jinping has called for a comprehensive effort to boost infrastructure this year, turning to an old roadmap to boost growth through public investment. Financing the additional spending proved difficult, however, following a plunge in land sales and widespread Covid outbreaks, affecting government revenues.

“We think the three key ingredients for investment – ​​projects, financing and incentives – will all fall into place this year,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc. “The additional 800 billion yuan loans from policy banks will help fill the funding gap, if any.”

Standard Chartered forecasts infrastructure investment to grow by 10-15% this year, although that may still not be enough to offset economic growth headwinds. Bloomberg Economics estimated that China’s infrastructure spending was 23 trillion yuan in 2021.

Beijing’s calls for faster implementation of growth-promoting policies have intensified since official data showed economic activity contracted in April and unemployment rose sharply. High-frequency indicators suggest the decline continued into May, leading Li last week to warn of risks of a possible year-on-year contraction in the second quarter.

Nomura Holdings Ltd. estimates that the government will face a financing gap of 6 trillion yuan this year, partly caused by a sharp decline in revenues from land sales, a major source of financing for infrastructure investment by local governments. The 800 billion yuan funding announced by the State Council accounts for nearly half of the 1.65 trillion yuan in new bank loans in 2021, economists led by Lu Ting wrote in a note.

Find support

China’s policy financiers include the China Development Bank, the Agricultural Development Bank of China and the Export-Import Bank of China. They are considered the main stabilizers of the economy and are often called upon to finance major projects, including infrastructure.

In 2014, for example, the policy banks were asked to help finance the renovation projects of the country’s slums. They were also urged to ramp up funding for major investment projects earlier this year as part of China’s wider effort to support companies affected by Covid.

The Council of State did not say in its latest announcement how the policy banks would finance the loans. The main source of money for the development banks comes from the issuance of bonds or loans from the Chinese central bank.

According to economists at Nomura, NatWest Group Plc, the banks may be able to raise the money by selling bonds — likely long-term bonds with terms of five, ten or twenty years — to fund a credit expansion. and Australia & New Zealand Banking Group Ltd.

And the People’s Bank of China could cut the reserve requirement ratio, or the amount of money banks are required to keep in reserve, by another 50 basis points to support the financial market with liquidity, said Liu Peiqian, China’s chief economist at NatWest Group Plc.

Special Bonds

Policy funding from banks could also ease the pressure on the government to borrow more in other ways, such as selling special government bonds.

“This has to some extent reduced the likelihood of additional local government special bonds or government special bonds being issued,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong Ltd. Those special bonds are being advocated by some as a way to pay for additional incentives to crank up the economy, but they would also pose a risk, adding to the already soaring government debt.

Despite the stimulus measures, China’s growth prospects will depend on how the government handles Covid outbreaks in the future. Economists forecast gross domestic product growth of 4.5% this year, well below the government’s target of about 5.5%. Some banks, such as Nomura, forecast growth of only 3.9%.

Covid cases have declined in recent weeks, leading to an easing of the lockdown in Shanghai. Still, the government’s strict Covid Zero policy, which requires restrictions on activity where outbreaks occur, means consumption is likely to remain subdued.

“The lockdown in Shanghai has been an outlier so far, but we should at least expect more outbreaks that require a certain level of restrictions,” Allan von Mehren, China economist at Danske Bank A/S, wrote in a note.



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