China debt reduction can wait while trade war with US rages
As economic uncertainties grow, much to central bank concern local governments will be able to borrow massively to fund infrastructure projects
When you are fighting a war, old priorities will have to take a back seat. China is in the midst of an unprecedented trade war with the United States that it didn’t ask for. It’s to be expected that Beijing will take measures to stabilise the economy, protect growth and maintain employment in the face of external uncertainties and domestic weaknesses. The country has a serious debt problem, a legacy of the spending binge after the global financial crisis, but it is facing imminent threats to trade, investment and the economy as a whole from the confrontation.
Under cabinet orders, the finance ministry will allow local governments to borrow massively to support infrastructure projects. The funds will come in the form of “special purpose bonds” worth 1.35 trillion yuan (HK$1.56 trillion), and 80 per cent of them may be sold before the end of September to leading financial institutions.
Until recently, infrastructure investment growth, supported by government spending, had slowed to 5.7 per cent, the lowest in nearly 20 years. Fixed-asset investment growth slipped to a new low of 5.5 per cent. These will now reverse course and accelerate as local governments move quickly to take advantage of newly available funds. Already Guangdong provincial authorities have released details about three bond sales to raise 44 billion yuan for urban development, affordable housing and water treatment projects in the Pearl River Delta region. A surge in the supply of such bonds will put pressure on the People’s Bank of China to loosen its monetary policy. The value of the yuan has already plunged, which is seen as beneficial to mainland exporters who have to contend with rising tariffs imposed by the US.
Understandably, the central bank, which has been behind the deleveraging campaign, has expressed concern at the new easing because it will no doubt worsen China’s debt problems and make deleveraging even more difficult. The longer the trade war, the greater the danger it poses to China and its debt problem. That’s why Beijing is eager to reach a viable compromise with the Americans and end the trade war. This is easier said than done.
There were hopes for a positive turn of events at the latest round of trade talks last week, but there was little sign of progress. America’s hostilities should not be underestimated, but the US is also paying a heavy price from the trade war. The fact that the Donald Trump administration is offering up to US$12 billion in aid to farmers hurt by retaliatory tariffs from China means it is well aware the confrontation is hurting its own political base of support. The sooner the trade war ends, the quicker Beijing may return to desperately needed deleveraging. But for now, that will have to wait.