Beijing Needs A Spending Binge To Bring Back Growth

By George Lei, Bloomberg Markets Live reporter and strategist

A dose of fiscal stimulus may help to cure some of China’s economic woes but whether Beijing is prepared to loosen its purse strings remains anyone’s guess.

Last month, Dow Jones reported that policymakers were weighing the issuance of special treasury bonds worth roughly 1 trillion yuan ($138 billion) to help fund new infrastructure projects. There’s been no official announcement since then but a growing chorus of experts at home and abroad are calling for more aggressive fiscal relief for Chinese businesses and consumers.

According to Richard Koo, chief economist at Nomura Research Institute who coined the term “balance-sheet recession” to explain Japan’s lost decades, it may take companies and households many years to cut down debt and restore financial health in a “very painful process.” In fact, more Chinese are now expecting their incomes as well as home prices to fall in the coming three months, according to a PBOC depositor survey. What Beijing should do, in Koo’s opinion, is to “focus all energy on fiscal stimulus to keep the economy going.”

Liu Yuhui, a prominent academic at a government think tank and former chief economist at several local brokerages, suggested at a public event last week that Beijing should utilize special government bonds to help companies, households and local authorities “repair their balance sheets in an aggressive manner.” Money raised through such debt can go toward covering social security payments from both employers and employees, so that businesses can hire more and workers earn more disposable income, according to Liu.

Wanting Beijing to shoulder a bigger share of China’s borrowing burden isn’t too much to ask: with corporate leverage well above Japan’s peak in the 1990s, early mortgage payments hitting a five-year high and local government coffers increasingly strained, the central government may be the only major player left to borrow. And it has room to do so: taking into account hidden liabilities from local government financing vehicles, total public debt stood at about 126% of GDP last year, roughly half of Japan’s level, according to estimates from Goldman Sachs.

The central authority borrowed at the fastest pace on record in 1Q. Still, increasing government leverage won’t run into “hard constraints” as long as the balance of payments remains healthy and inflation pressure doesn’t pick up, Xu Gao, chief economist at Bank of China International, argued in an article last week.

Beijing is probably holding back for fear that aggressive stimulus will overstimulate the economy and fuel a jump in leverage, like it did in the past. But authorities may be left with no choice if no one else steps up to revive spending and growth.