To alleviate the development and debt problems faced by the Chinese economy, Anbound's chief researcher Chan Kung has suggested that the central government could consider large-scale financial debt issuance to systematically alleviate debt problems and various development constraints. Our rough estimation shows that if the problem needs to be resolved more thoroughly, China may need RMB 30 trillion to 50 trillion debt increase in the future.
This suggestion has caused some doubts. The current Chinese central government is emphasizing the reduction of leverage and preventing major risks, why should it greatly increase debt to increase leverage?
We have explained the reasons; that in the face of current and future domestic and international situations, China's maintenance of sound economic growth and other development goals cannot be based on a linear basis; instead it should be determined based on the combination of structural defects and problems of the domestic and international economy. In this regard, the future is far from being optimistic. To solve these severe challenges and problems, it is necessary for the economy to maintain certain dynamics. This requires China to significantly expand its debt issuance and achieve the multiple goals of economic growth and structural adjustment through debt expansion.
In other words, the Chinese economy has many structural problems under capital surplus in the past. Now when the world's major central banks begin to tighten, the global market liquidity may decrease, and various structural problems are starting to emerge. What is troublesome is that these problems are often intertwined and it is difficult to them one by one. If we want to alleviate the contradictions at the same time, the larger scale of "discharging" is probably inevitable. As a major economy, China is fully qualified to ease the increasing debt risk and development problems by appropriately expanding government debt.
Anbound's current fiscal suggestion might appear as awkward at this moment; many people still look at the debt problem from a static perspective, even their way of seeing the future trend is based on simple linear analysis and they believe that the increase in debt will inevitably increase the risk. As a matter of fact, the policy idea of releasing larger amount of debt is precisely based on the dynamic and comprehensive consideration of complex issues. It is hoped that through substantial debt expansion, conditions for solving systemic economic problems could be created, thereby providing space for maneuver and thus reducing the possibility of the outbreak of systemic risks.
We have noticed that the idea of the central government's policies have gradually begun to be recognized by some authorities. In a recent research, Xu Zhong, the Director General of the Research Bureau of the People's Bank of China, has not only mentioned that China cannot solely rely on the monetary policy; fiscal and taxation system reform, and fiscal policy should play a more active role as well. Xu Zhong believes the root cause of China's high-leverage risk lies in the aftermath of reforms of the fiscal and taxation system, irrespective if it is the hidden debt of government, the high leverage of state-owned enterprises or the rapid rise in household leverage in recent years, defects with the fiscal and taxation system are primary reason. The fiscal relationship between central and local [government] has never been smoothed out, the proper door for local government financing hasn't been opened, and when province-level governments issue debt on behalf of municipal-level governments the rights and responsibilities do not match, which spurs central government intervention, leading to implicit guarantees and moral hazard.
Xu Zhong believes that to solve these problems, local governments must be encouraged to establish a mechanism of information transparency and hard constraints. The central government can issue long-term government bond for local government debt, but only if the local governments establish information transparency and hard constraint financing mechanism; the places with such mechanism will be able to receive the central government's financial guarantee. This means that the central government should really spend money to build up the mechanism. In the context of laying a solid foundation for preventing and resolving major risks, monetary policy should be sound and fiscal policy should be active and not deflationary.
It should be pointed out that the debt issuance that we proposed is different from the credit expansion in the financial sector. The expansion policy in the financial sector either comes from the relaxation of monetary policy or from the credit expansion of commercial banks, both of which are prone to financial risks. The central government's issuance of national bond depends on China's credit as a major economy. Compared with other countries in the world, there is much space for the credit expansion of China's national economy. In terms of specific practices, issuing long-term national bond can be an important policy option.
Final Analysis Conclusion:
It is difficult for China to ease the varieties of complex problems it faces through austerity. Financial "profligacy" to solve several issues should be the policy option. The greater the downward pressure on the Chinese economy, the higher possibility the government would introduction of the "profligacy" policy.
