China’s economy needs a jolt from special treasury bonds like Beijing used in 2020, economists say

Despite the economic impact appearing to be at the worst point of the pandemic for China, its fiscal stimulus measures have not been as aggressive as in 2020
Think tank says China needs to sell nearly US$300 billion worth of special treasury bonds if Beijing expects to reach its annual economic growth goal of 5.5 per cent

China's economic recovery

Luna Sunin Beijing

Published: 7:00pm, 23 May 2022

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Calls are rising among Chinese economists who believe the central government should issue special treasury bonds to help the nation correct course in the face of powerful headwinds that threaten to keep economic growth below Beijing’s annual growth target.

China would need to issue around 2 trillion yuan (US$299 billion) worth special treasury bonds to help stimulate the economy enough to reach leadership’s goal of “around 5.5 per cent” growth for the year, according to a report published last week by the China Wealth Management 50 Forum.

“Preliminary estimations showed that economic growth in the second half of the year needs to stabilise at around 6.5 per cent for the whole year’s economic growth to be near 5 per cent – and based on that, a 2 trillion yuan fiscal deficit is required,” said the report by the non-government and non-profit academic think tank.

The country has remained unwavering in its zero-Covid policy and continues to impose stringent restrictions and lockdowns across the country.

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Consequently, major economic indicators released last week showed how dramatically China’s economy shrank in April, with industrial production, retail sales, fixed-asset investments, and the surveyed jobless rate falling to their weakest levels in more than two years.

Experts are arguing that China is now enduring a worse economic fallout than it did at the onset of the pandemic. But fiscal stimulus measures have not been on a par with what was seen in June 2020, when the country auctioned 1 trillion yuan worth of special treasury bonds to help fund stimulus and shore up the economy that had shrunk for the first time since 1976.

Before 2020, China had not issued a special treasury bond since 2007, when it sold 1.55 trillion yuan worth of bonds to capitalise its new sovereign wealth fund, the China Investment Corporation.

But with downward pressures intensifying in recent months, and the potential for the situation to become far more dire, more experts are urging the government to do more to stimulate the economy, and that includes calls to give cash handouts to the most vulnerable citizens and businesses.

“In 2020, at the beginning of the pandemic, China issued special treasury bonds to fight Covid, and it had a positive effect,” the China Wealth Management 50 report said.

“The scope and pressure of the current outbreaks are comparable to the beginning of 2020,” the report added. “Under the circumstances that the total scale of the general public budget and fiscal expenditure is difficult to adjust in the short term, [we] recommend the issuing of special treasury bonds to provide financing support for the coordination of pandemic prevention and control and economic and social development.”

Analysts Wang Qing and Feng Lin with the Golden Credit Rating International said in an interview with The Paper – an online newspaper run by the Shanghai United Media Group – that an adjustment to the fiscal budget could be appropriate in May, with a possible increase in the fiscal deficit target or issuance of special treasury bonds.

Other economists said the issuance of special treasury bonds could help fund normalised coronavirus-prevention measures and infrastructure construction projects.

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The country has started to loosen its fiscal policies, raising expectations for further policy easing when the People’s Bank of China on Friday cut the five-year loan prime rate – the reference for mortgages – from 4.6 per cent to 4.45 per cent

The cut was announced after home sales slumped by 46.6 per cent from a year earlier by value in April, from a 26.2 per cent fall in March. The central bank’s move represented the largest cut on record and was the second this year, after the rate was reduced from 4.65 per cent in January.

During his visit to Yunnan province last week, Premier Li Keqiang told local authorities to front-load support measures and implement new policies by the end of May to shore up growth.

This could suggest that policymakers might want to leave room for additional fiscal-policy support in the second half of the year, such as the potential issuance of central government special bonds, according to a Goldman Sachs report last week.