Trillions in Rescue Aren’t Coming From China

(Bloomberg Opinion) -- Don’t hold your breath. Massive Chinese stimulus isn’t coming to shore up the world.

As China tries to get back on its feet from Covid-19, policy makers are announcing more fiscal help to deal with the worst economic hit in decades. This has included plans to spend trillions of yuan on standard measures from the Beijing playbook, such as issuing infrastructure bonds to boost activity, lower lending rates to help struggling companies, and cheap credit for small banks to support them.One measure from recent days stands out: Special central government bonds, a tool authorities have pulled out only twice before, in moments of dire financial pressure. This signals both seriousness and, ominously as the rest of the world looks for China to join in the rescue, that the country is being pushed into a corner. China’s economic engine, long a driver of global demand, may not rev up.

Though China has been first-in and somewhat first-out on the virus, the measures laid out so far still amount to only 1.6% of gross domestic product on-budget and 1.7% off-budget. Compare that to Australia and South Korea, where off-budget measures already amount to 5.2% of GDP in addition to budgetary help, according to Credit Suisse Group AG analysts. Beijing is relying more on monetary policy to flush the system with liquidity and boost credit, unlike some countries where fiscal measures are playing a larger role.

This reflects the reality that China is running out of effective tools. The special treasury bonds are therefore notable. They have only been deployed previously when things just had to get done. In 1998, Beijing used them out to recapitalize banks as the financial crisis pummeled Asia. In 2007, they were marshaled to set up sovereign wealth fund China Investment Corp. and strengthen foreign-exchange reserve management. They don’t end up on the government’s balance sheet and are earmarked for specific, targeted policy goals.

This time, the bonds could directly fund China Inc. or recapitalize banks so they’ll have more room to lend. Nomura Holdings Inc. analysts estimate that almost 2 trillion yuan to 4 trillion yuan ($282 billion to $563 billion) of these long-maturity obligations could be issued to fill the gap between the official and actual fiscal deficit targets. Unlike regular central government bonds, these need to be put to spending that has returns, which could force some discipline.

China doesn’t have the fiscal space of a decade ago, when it unleashed a 4 trillion yuan package to shore up what was then a much smaller economy and the rest of the world with it. Revenues plunged almost 10% in January and February from last year; those from land sales fell 16.4%. That’s only an early blow. At the local government level, revenue last year grew at the slowest pace in a decade. Property prices are dropping across several cities. With the need for expenditure and leverage rising, the ability to service borrowings has become difficult.There aren’t many places left to add more debt. China’s overall burden as a portion of its GDP is among the world’s highest. Local government debt has dominated in recent years as almost all of the 2.15 trillion yuan quota of municipal off-books bonds for specific projects was issued. Meanwhile, years of using state-backed enterprises’ balance sheets to boost economic growth has leveraged them to the hilt. Households are also strained.

The special treasury bonds represent something of a last stand. They’re going to indirectly lean on China’s banks, which have other problems. Herein lies the risk. Banks are currently staring into a credit down-cycle made worse by the virus shock, which will amount to billions in yuan of non-performing assets, rising credit costs and slower profit growth. Jitters in the sector last year have hit confidence. Rounds of monetary-policy easing have pushed them to lend to the weakest borrowers. As Goldman Sachs Group Inc. analysts put it, issuing these bonds signals “a new round of loosening, monetizing fiscal stimulus via the central banking system, leveraging on banks to ramp credit growth.”

Much of this will mean that prudent policies to unwind the leverage buried in China’s labyrinthine financial system will be thrown aside. More debt, on or off the books or contingent liabilities, will pile up. The type of stimulus China really needs — for consumers — won’t arrive.This time, China has limits that it has rarely faced in the past. As Beijing is constrained to turn inward, it’s no wonder that other countries are coming out with far more aggressive measures.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

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