Special Treasury Bonds and Tax Reduction: A Critical Look at Beijing's Economic Strategy

The Need for Significant Special Treasury Bonds

China should issue at least 10 trillion yuan (US$1.4 trillion) worth of long-term special treasury bonds to boost consumption and assist local governments in settling debts.

Opportunity for Fiscal Stimulus

The proposal comes amidst calls for a fiscal stimulus package after a series of interest rate cuts and monetary policy easing last week, which sparked a stock market rally.

• Mao Zhenhua, co-director of Renmin University’s Institute of Economic Research, emphasizes the need for a substantial bond issuance.
• Such a move could help raise the official fiscal deficit ratio.
• Proceeds from these bonds are suggested to subsidize household spending via consumption vouchers and repay private sector debts.

Tax Reductions and Local Government Support

Mao proposes tax reductions for businesses while allocating some bond proceeds to local governments to offset revenue losses due to these tax cuts. However, concerns arise over local governments struggling to meet financial obligations.

The Impact of Local Government Debt

According to Yuan Haixia, a senior researcher at China Chengxin International, interest payments on local government debt will exceed 4 trillion yuan (US$586 billion) in 2024, consuming more than 20% of local fiscal revenues.

While the stock market shows positive trends, experts agree that more effective fiscal policy changes are necessary to benefit households and businesses. The debate continues over whether bond proceeds should focus on consumers or infrastructure projects.