According to data announced by the People's Bank of China on January 25th, the bond market issued a total of RMB 43.6 trillion of bonds in 2018, an increase of 6.8% over the previous year. The scale of issuance in the bond market continued to increase, and the number of investors has increased as well. An announcement by the Chinese central bank on the market operations of the financial market shows that in 2018, China's government issued RMB 3.5 trillion of treasury bonds. The number of local government bonds issued was RMB 4.2 trillion, financial bonds at RMB 5.3 trillion, government-backed institutional bonds at RMB 253 billion and asset-backed securities at RMB 1.8 trillion. RMB 21.1 trillion of interbank deposit certificates were issued, and RMB 7.3 trillion of company credit bonds were issued. As of the end of December 2018, the bond market had a custodial balance of RMB 86.4 trillion.
With the deterioration of the external economy in 2019, downward pressures faced by the Chinese economy are expanding. How then, should the Chinese macroeconomic policies be formulated and implemented? This is a high-level problem that is monitored by the Chinese domestic market. The official policy position and tone is "stable monetary policy" complemented with "more active fiscal policy". In end 2018's Central Economic Work Conference, a proposal that fiscal policy should be "more active" was raised. The monetary policy has begun to shift toward easing. In less than a month into 2019, the People's Bank of China has also introduced a number of loose policies. However, some market analysts believe that China's macro policy in 2019 should be a combination of "tightening fiscal policy + relaxing monetary policy". This view is not similar with the policy tone publicly given by the Central Economic Work Conference.
In order to truly implement a more active fiscal policy, in addition to continuing to implement tax and fee reduction policies that "take less", it is necessary to pay attention on policies that "give more" such as issuing bonds. Anbound's macro research team believes that the scale of the RMB 3.5 trillion of government bonds issued in 2018 is still somewhat small. In 2019's implementation of fiscal policy, the scale of issuing government issuance should be moderately increased. If local debt expansion is subjected to policy restrictions, then priority can first be given to expanding the size of government bond issuance.
With regards to thoughts on how active should fiscal policy be for the current year, there has been continuous dispute within the country. One central question is this: How much should the Chinese government's control the deficit rate in order for it to be appropriate? A lot of opinions believe that China's deficit rate cannot exceed 3%, otherwise it will trigger the risk of debts.
Historically, it is not uncommon for major global economies to exceed a 3% deficit rate. According to data provided by the IMF on 2008-2017, the deficit rates of the United States and Japan over the past decade has been 6.5% and 6.8% respectively. Among the BRICS nations, the deficit rates of India, Brazil and South Africa was at 7.9%, 4.8% and 4.1% respectively. Looking back at the 2003-2018 government work report, China's fiscal deficit rate target has never exceeded 3%. Yang Zhiyong, a researcher at the Chinese Academy of Social Sciences, believes that in the process of formulating fiscal policy, China should not be bound in its decision making by the 3% red line. The supposed 3% deficit red line is actually a product of the political compromise in the European Union, and should not serve as a hard guide. Behind the whole structure of large-scale tax cuts, the most necessary assurance is the sustainability of fiscal operations. If the sustainability of fiscal operations can be guaranteed, then breaching the 3% red line would not result in an unbearable outcome.
Committee member of the Chinese Academy of Social Sciences Yu Yong Ding, a member of the Chinese Academy of Social Sciences, also said that under the environment of the Fed's continued interest rate hike and the growth and differentiation of the world's economy, China's economy will continue to face downward pressure, and external uncertainty still exists. At the same time, steady growth, economic system reform, economic structuring and financial risk prevention, among other short, mid and long term tasks have yet to be completed. At this point, it is important to grasp key issues. China's current imminent problem is to further reduce the economic growth rate. For this reason, it is necessary for China to implement an expansionary fiscal policy, supplemented by a moderately loose monetary policy.
According to data from the Chinese Ministry of Finance, the balance of local government debt in China is RMB 18.39 trillion as of the end of 2018. If the local government debt level is measured by debt ratio (debt balance/comprehensive financial strength), the 2018 local government debt rate is 76.6%, which is lower than the internationally accepted 100%-120% warning standard. Together with the central government debt balance of RMB 14.96 trillion, according to the preliminary calculation of GDP published by the Chinese National Bureau of Statistics, the debt ratio (debt balance/GDP) of government debt is 37% (the debt ratio in 2017 was 36.2%, and in 2016 it was 36.7%). This is lower than the EU's 60% warning line. It is also lower than that of major market economies and countries with emerging economies. This signifies that China still has room to moderately expand the government's debt ratio.
Anbound's Chief Researcher Chan Kung analyzed this problem from a different perspective. According to Chan Kung, looking from the viewpoint of the disposable financial resources realized by policy, and taking into the consideration the relative rigidity of fiscal expenditures, it can be seen that in the Central Government's policies, in order to meet the funding needs of the real economy, most of them still rely on various hidden means to obtain funds. Chan Kung stressed that pointing out this problem is not about differentiating between good and bad policy and policy decisions. Rather, it should be understood that this practice of relying on implicit operations is not conducive to policy sustainability. A thought to consider, if the Central Government's funds are not centralized, and if there are increasing tasks to be undertaken by the Central Government, the policy of strictly controlling the debt ratio will eventually encounter unsustainable problems. In addition, the operation of implicit liabilities is also very opaque, which is not favorable to the improvement and improvement of governmental governance.
Final analysis conclusion:
In our view, considering the pressure of this year's economic downturn and the actual debt ratio, and the implementation of the "more active" fiscal policy proposed by the Central Government, the issuance of treasury bonds this year can be appropriately expanded. It is also fully acceptable to break the deficit rate of 3%. The important thing is to send a clear signal to the market through moderately expanding government bonds and pushing monetary policy towards easing. The market should know that: the Central Government will respond to economic downward pressure with strong economic policies.
