CITIC Securities Co., Ltd.: Vigorously countercyclical, never just for the present

On October 12, 2024, the State Council Information Office held a press conference where Minister of Finance Lan Fo'an introduced the situation regarding "increasing the intensity of fiscal counter-cyclical adjustment policies to promote high-quality economic development." The meeting introduced multiple specific and practical incremental policies, clearly addressing risks. It was also pointed out that the central government still has considerable borrowing space, sending a positive signal of fiscal policy and boosting market expectations. Specifically, the following important deployments are worth noting: 1) Intensifying debt resolution efforts, planning to significantly increase the debt limit at one time to replace local government existing hidden debts. 2) Clearly supporting state-owned banks to supplement Tier 1 capital, enhancing the risk resistance capability of state-owned banks. 3) Introducing special bond policies to reclaim idle land, land acquisition, and related tax policies, reflecting the determination of fiscal support for stabilizing the real estate market. 4) Consolidating grassroots "three guarantees" expenditures, further strengthening education assistance policies. 5) Improving people's livelihoods and promoting consumption will be the focus of future fiscal policies. 6) It is clarified that special bonds can be used to acquire existing housing for affordable housing, as well as to resolve debt issues of existing government investment projects.

▍ The meeting conveyed a positive signal of fiscal policy, with short-term incremental policies clearly addressing risks and increasing the enthusiasm of various market entities. In the long term, it was pointed out that the central government still has considerable borrowing space and deficit enhancement space.

After the National Day holiday, market investors are highly concerned about the pace and effectiveness of fiscal policies for the rest of the year and next year. At this meeting, Minister of Finance Lan Fo'an and three deputy ministers responded effectively to the issues of concern in the market with specific and practical risk-reducing policies and positive expectations management, effectively boosting confidence in the capital market. On the one hand, Minister Lan provided detailed explanations on policies that are already in the decision-making process, such as resolving local government debt, supplementing core capital of banks, supporting the stabilization and recovery of the real estate sector, and increasing support for key vulnerable groups. By resolving risks, resources are freed up for economic development among various market entities. On the other hand, Minister Lan also pointed out that other policy tools are under study for the future, emphasizing that the central government still has considerable borrowing space and deficit enhancement space. We expect the economy and capital markets to stabilize and recover together in the future with the support of specific policies and optimistic expectations.

▍Debt resolution policy as a timely rain, planning to significantly increase the debt limit at one time to replace local government existing hidden debts.

Since the launch of the debt resolution package, the Ministry of Finance has arranged over 22 trillion yuan in local government bond quotas to support local, especially high-risk areas, in resolving existing debt risks and clearing overdue corporate accounts. Since 2024, following the relevant procedures, the Ministry of Finance has arranged 12 trillion yuan in debt limits to support local debt resolution. Looking ahead, in addition to annually allocating a certain amount of bonds in the new special bond quota to specifically support the resolution of existing government investment project debts, it plans to significantly increase the debt limit at one time to replace local government existing hidden debts, intensifying debt resolution efforts. This move will greatly alleviate the pressure of local government debt, free up more resources for economic development, boost confidence of operating entities, and consolidate grassroots "three guarantees." ▍In recent years, with the increase in support for the real economy by state-owned banks, the asymmetrical downward trend between asset-side yield and liability-side cost has led to a narrowing net interest margin space. The internal capital replenishment capability has declined, necessitating the supplementation of bank capital through external channels.

Especially for the four major banks, although the core Tier 1 capital adequacy ratio still has a considerable distance from the regulatory red line, there is still a significant funding gap to meet the TALC standards by 2025. Due to limitations on external channels such as perpetual bonds, state-owned banks are facing difficulties in issuing perpetual bonds on a large scale in the short term. The Ministry of Finance has explicitly proposed to support state-owned banks in replenishing Tier 1 capital, which can significantly enhance their risk resistance capability, alleviate capital replenishment pressure, and improve their ability to support and serve the real economy.

▍ One of the subsequent four major incremental measures mentioned by the Ministry of Finance is to promote the stabilization of the real estate market, reflecting the determination of the Ministry of Finance to strengthen coordination in stabilizing the real estate sector, involving special bond redemption of idle land, land acquisition and related tax policies.

Regarding specific incremental policies, the Ministry of Finance has clearly put forward three measures: first, to support local governments in using special bonds to redeem idle stock land that meets the conditions. In fact, as early as the press conference held by the State Council Information Office on May 17 this year, Deputy Minister of Natural Resources Liu Guohong stated that policies were being prepared to support local governments in reclaiming idle land that enterprises are unable to develop at a reasonable price, or acquiring land that has been unsold in judicial and bankruptcy auctions. We believe that this aligns with the "strict control of increments" proposed at the September Politburo meeting, which can reduce idle land and help alleviate the liquidity and debt pressures of local governments and real estate enterprises. Second, to support the acquisition of existing housing and increase the supply of affordable housing. Specific sources of funds include special bonds and subsidies for affordable housing projects. Currently, the main source of funds for affordable housing acquisition is the 300 billion special refinancing funds, which is expected to effectively alleviate the pressure on local governments to acquire housing, but the actual effect may still need further observation. By 2024, the total allocation of funds for central finance urban affordable housing projects is 70.78 billion yuan, with an additional special bond quota of 3.9 trillion yuan. Third, to timely optimize and improve relevant tax policies, such as actively studying and clarifying the value-added tax and land value-added tax policies related to the connection and cancellation of standards for ordinary and non-ordinary residential properties. This measure may help increase the activity of individual housing transactions, enhance the willingness for housing improvement, and alleviate the financial pressure on developers.

▍The meeting called for further consolidation of grassroots "three guarantees" expenditures, increased support and protection for key groups, and further strengthening of education assistance policies.

Affected by the slowdown in fiscal revenue growth and the decline in land transfer income, the pressure on some local areas to ensure basic livelihoods, wages, and operations, known as the "three guarantees," has increased. The Ministry of Finance has explicitly proposed three policy measures at this meeting: first, by enhancing local financial resources through increased transfer payments, debt substitution, expanding local tax sources, and appropriately expanding local tax management authority, to comprehensively strengthen local financial capabilities. Second, actively building a stable long-term mechanism for "three guarantees" expenditures. By solidifying local expenditure responsibilities, strengthening central monitoring of local treasury funds and "three guarantees" funds throughout the process, risks can be promptly identified One of the key focuses of the subsequent fiscal policies is to benefit the people and stimulate consumption. The emphasis is on increasing support for key groups, in addition to ensuring the bottom line, increasing debt conversion efforts, which logically also have spillover effects on consumption.

Minister Lan Fo'an mentioned at the press conference the need to enhance support for key groups. Before National Day, one-time living allowances were distributed to the needy, and the next step will focus on increasing awards and assistance for students to enhance overall consumption capacity. Given that the "benefiting the people and stimulating consumption" goals were emphasized in the Central Political Bureau meetings in July and September, it is expected that other policies supporting key groups may also be gradually introduced. Furthermore, ensuring the bottom line, increasing debt conversion efforts will help ensure that grassroots wages are paid in full and on time, which logically will also have a certain spillover effect on consumption.

Reforms in the use and management of special bonds mainly involve expanding their scope and managing project asset ledgers. This will help alleviate cash flow pressures for local governments, some real estate companies, and construction enterprises, promoting a balance between government debt and project assets.

The press conference clarified that the use of special bonds will be expanded, mainly for the acquisition of existing housing for affordable housing and resolving debt from existing government investment projects. The former will help stabilize the real estate market, reduce cash flow pressures on real estate companies, while the latter will alleviate issues with insufficient funds for continuing or settling old projects. The conference also proposed to improve the full life cycle management of special bond "borrowing and repayment," ensuring a balance between government debt and project assets, exploring early repayment of special bonds to enhance project and debt management efficiency.

Risk Factors:

Macroeconomic recovery falling short of expectations; timing or effectiveness of counter-cyclical policies falling short of expectations; reform measures not meeting expectations; geopolitical uncertainties exceeding expectations.

Authors: Yang Fan, Ming Ming, Yu Xiang, Li Han, Maxigova, Dou Zihao, Ren Liurong; Source: CITIC Securities Research; Original Title: "CITIC Securities | Vigorously Counter-Cyclical, Not Just for the Present: Macro Financial Policy Review"