Ethan Tan’s Post

Countries around the world face a fiscal policy trilemma: pressure to increase spending, public resistance to higher taxes, and risks from rising debt levels. Countries must navigate these challenges to maintain economic stability and growth. Writing in Foreign Policy, IMF's Vitor Gaspar outlines strategies for policymakers to address this trilemma effectively. https://bit.ly/4ezo4U5

When has Chinese officials touted the RMB10tr number? Never. The first I read about it was on 21 Sep, when "Liu Shijin, former deputy director of the State Council’s Development Research Centre" raised it as an estimate of what China needs a stimulus. (See link below) And you know what they say about round numbers? Usually POUTA. "A leading economist in China said the country has room to ramp up fiscal support for the economy by issuing as much as 10 trillion yuan ($1.4 trillion) in special debt, reflecting rising expectations for Beijing to expand public spending as part of its stimulus package." He thinks there is room - but the money is NOT FREE. "“The ask for fiscal expansion will only increase from here,” Ahya, chief Asia economist, and others wrote in a Tuesday note. “While there is as such no hard limit on how expansionary fiscal policy can be, we believe that policymakers may be naturally hesitant to provide significant accommodation against the backdrop of wide fiscal deficits and elevated levels of public debt.” So will China roll out a RMB10tr stimulus? Probably not. It seems that RMB2tr is on the cards, and maybe RMB5tr ... but as one goes further up the numbers, there is just less likelihood. Next if RMB10tr bonds are issued, WHO will buy? If it is mostly local funds, then the RMB10tr will likely squeeze liquidity. And finally, what if the RMB10tr 'works' for 2 years; and then the debt fears return - without having restructured the elements of the economy? Another bazooka???? In the article only Stanchart thinks so.

We have just published some thoughts on China's recent policy announcements: A slate of economic policy announcements by the Chinese authorities should reduce downside risks to growth, Fitch Ratings says, but do not warrant upgrades to the agency’s real GDP growth forecasts of 4.8% in 2024 and 4.5% in 2025. Greater fiscal support is supportive of growth, but a deterioration in government debt metrics would add to downside pressure on China’s sovereign rating depending on the degree to which it can induce an acceleration in underlying demand and ease deflationary pressures. However, uncertainty persists around the magnitude and form of the fiscal response.

The comments add to a growing discussion over what the Ministry of Finance will — or should — do to boost the world’s No. 2 economy after Beijing signaled its desire to draw a line under its growth slowdown. The elite 24-man Politburo urged officials to issue ultra-long special sovereign bonds and local special notes to drive investment without giving specifics, fueling speculation on the strength of the fiscal measures The debt issuance analysts suggested would be many multiples of the 1 trillion yuan in ultra-long special sovereign bonds the government planned to sell this year. But they said that would be a proportional increase from the 4 trillion yuan stimulus package in 2008, given China’s gross domestic product had quadrupled in nominal terms by the end of 2023 Using public debt mechanisms properly won’t overburden the government,” he told The Paper. “Long-term and ultra-long-term government bonds, with 30- to 50-year maturities, offer significant flexibility and are worth utilizing, remaining within safe limits.”  Reuters reported last week that the Ministry of Finance is planning to issue 2 trillion yuan of special sovereign bonds this year. That funding will be evenly split between stimulating consumption and helping local governments tackle debt problems, the news agency said, citing two people familiar with the matter. Beijing’s stimulus blitz fueled a rally in stocks, with the the benchmark CSI 300 Index jumping the most since 2008 on Monday before the country entered a weeklong holiday. A gauge of Hong Kong-listed Chinese companies rose for 13 straight sessions on stimulus optimism until a pullback on Thursday, when it fell as much as 4.9%. Now the focus is turning to any coming fiscal support. Economists believe greater spending is needed to boost domestic demand, with consumer confidence falling to its weakest in August since November 2022.

Spending 108.8% of what you make isn't a very sustainable game plan is it? Please don't respond with a political statement, this is a math statement. Massive deficit spending by both parties has led us to $34T national debt, highest debt/GDP since the WWII spike, and will lead to our first $1T annual interest payment budget line item -- that is mind-boggling. Paying interest on our national debt alone will be larger than the entire annual government budget of every country in the world except China (according to 2022 data). This is insane.

This is from an IMF pamphlet published years ago, yet - it can be used to feel the pulse of the economy today. "Loose fiscal policy may not be sustainable. It implies, for example, continuously rising debt levels, which creates uncertainty as to how and when the loose policy will be corrected (e.g., through a burst of inflation, a disorderly depreciation, price and foreign trade restrictions, or large tax increases). These circumstances reduce private investment as they cause investors to wait and see how the uncertainty will be resolved and they prompt capital flight. Loose fiscal policy may also make the economic environment more volatile (e.g., by recurrent, and ill-timed, bursts of fiscal contraction and expansion), which can weaken investment by increasing" https://lnkd.in/gps6eUbT

“China’s public finances also face longer-term strains. With an ageing population, the share of GDP devoted to pension spending will increase by about nine percentage points by mid-century, estimates the IMF. The erosion of China’s government revenues appears persistent. They began to decline even before the pandemic, notes Jeremy Zook of Fitch, falling from about 30% of GDP in 2018 to roughly 23% in 2024. And China has yet to find a source of revenue to replace land sales, which have suffered from the property slump. In light of such difficulties, Rhodium Group, an American research firm, has argued that China’s “fiscal space” is a myth.But a government’s room to borrow and spend partly depends on what else is going on in the economy. The space available depends on who else wants to fill it. If the private sector is in an expansive mood, government deficits get in the way, pushing up borrowing costs and inflation. China, sadly, has the opposite problem. Households and private entrepreneurs are in retreat, reluctant to spend and all too eager to accumulate safe financial assets instead.”

⚡️China Announced New Economic Stimulus, But Has Not Yet Detailed Its Plan ⏺China has announced new stimulus plans, promising to soon introduce a package of additional fiscal policy measures to support economic development. It is reported that the package includes a significant increase in public debt, measures to support consumers, local authorities, subsidies for the poor, recapitalization of banks, measures to stabilize real estate markets. ⏺However, during Saturday's press conference, specific details of the plan and, most importantly, numbers were not yet announced, which is likely to prolong nervousness in the markets in anticipation of a clearer policy roadmap of the Chinese authorities. China's legislature is expected to meet in the coming weeks to approve additional debt issuance. ⏺A wide range of economic data in recent months has fallen short of forecasts, raising fears among economists and investors that the government's goal of growing the economy by about 5% this year is in jeopardy and that a longer-term structural decline could occur. Data for September, due out next week, is expected to show a further decline, but officials said they were "fully confident" the 2024 target would be met. ⏺New fiscal stimulus was the subject of intense speculation in global financial markets after a September meeting of the Communist Party's Central Committee Politburo signaled a heightened sense of economic urgency.

Some thoughts on the budget: - Going by the numbers, the budget reflects the government’s commitment towards fiscal prudence. Capital expenditure has been retained at the same level while on revenue expenditure, there’s a marginal rise as compared to the interim budget. - Minor tweaks in income tax slabs and raising of standard deduction is a positive for consumption. - The hike in tax on capital gains could disincentivise retail participation in stock market, hit investor sentiments. There could be a shift back to bank deposits.