2024-05-14 07:42:16
This Monday, May 13, China kicked off its plan to support the economy, which has been stalled since the end of the Covid-19 pandemic. From May 17, the state is launching a mega loan worth a trillion yuan. This plan has been hoped for for a long time by economic players. Will it live up to their expectations?
One thousand billion yuan, that’s about $140 billion. A considerable amount of public debt which will be raised in several installments, until November, with very long maturities, from twenty to fifty years. The State wants to finance critical sectors, such as energy or food security, to restore momentum to growth.
Covid-19 then the real estate crisis literally froze the investment projects of businesses and households. Currently, the only healthy sector of the Chinese economy is that of export industries. And this could very quickly deteriorate if the UNITED STATES and theEurope take measures to protect their markets.
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A debt issue of such a large amount is a fairly rare event. The Chinese state uses it only sparingly, for only the fourth time in twenty-five years. This mega bond is in the same spirit as that which was launched in 2020 during Covid.
At the end of the 1990s, Beijing resorted to a large loan to recapitalize its banks, and in 2007 to replenish its sovereign wealth fund. This time, Beijing expects an effect on the entire economy. These 140 billion dollars could bring an additional point of growth to China and allow it to achieve its official objective set at 5% for 2024.
Infrastructure rather than consumption
But not sure that the real objective has really been achieved. Finding new money to invest in infrastructure is good in macroeconomic terms but not necessarily for regaining the confidence of operators, businesses and households. Today, the cost of money is relatively low in China, below 3%, which does not mean that individuals want to buy an apartment or that businesses plan to expand.
In April, outstanding bank loans fell drastically, falling to their lowest level since 2005. Another downside: the funds raised last year by the State have not yet been fully reinvested. This new money will therefore not necessarily be re-injected quickly into the Chinese economy.
The Central Bank in action
To ensure the success of the operation, the Chinese Central Bank should quickly provide relief to the banks by lowering the level of their reserve requirements. It could also reduce interest rates to boost the market. The Central Bank, which is not used to intervening in the debt market, could even subsequently buy back these treasury bonds on the secondary market.
This mega loan would therefore also be a preamble to monetary stimulus measures of a completely different scale. On the model of monetary easing practiced by the Federal Reserve. A large format therapy to regenerate an economy exhausted after thirty years of frenzied growth.
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