China should significantly increase its central government debt issuance to compensate for the financial constraints faced by local authorities, according to a prominent economist. This recommendation aims to drive economic growth amid local governments’ spending limitations.
Leading economist Li Daokui, a regular policy adviser and professor at Tsinghua University in Beijing, emphasized the necessity of raising the central government debt to GDP ratio, which currently stands at approximately 20%. He suggested that this ratio should be more than doubled to stimulate economic growth.
The central government debt to GDP ratio should be more than doubled to stimulate growth.
Beijing has already initiated the issuance of 1 trillion yuan ($138 billion) in special bonds for public investment. However, Li advocates for a far greater issuance, proposing 10 trillion to 20 trillion yuan of extra-long bonds.
China’s increasing willingness to boost central government borrowing has been evident since last year. Local governments, key investors, and consumers in the economy, are facing escalating financial pressures, with debts equating to nearly 100% of GDP. Li highlighted that the decline in revenue from land sales, caused by a housing market downturn, has worsened this situation.
A recent auction of special bonds saw massive demand from retail investors, prompting warnings from officials about speculative trades. This highlights the scarcity of safe-haven assets in a slowing economy.
Li noted that there is a “tremendous amount” of liquidity within the banking system as households and companies prefer saving over spending. However, the willingness of families to purchase central government bonds presents a strong case for the government to issue more bonds and replace local government debt.
Families are willing to buy central government bonds, making a strong case for increased issuance.
Addressing the government’s property sector rescue efforts, Li criticized the central bank’s 300 billion yuan funding to help local governments purchase excess housing inventory as insufficient. He stressed the importance of preventing property developers from defaulting on their debts.
Li anticipates further government measures in the upcoming months, with significant announcements expected during the Communist Party’s “third plenum” in July.
