Mind the gap

Chinese officials are finally looking to close a looming fiscal gap in Q4 2023.

The latest: On Tuesday, China’s legislature officially approved RMB 1 trillion of new central government bond issuance to take place in Q4 2023.

• The proceeds of the issuance will be transferred to local governments to “support post-disaster recovery and reconstruction, and to address shortcomings in disaster prevention.”
• However, the transfer payments to local governments are expected to take place in two batches – with RMB 500 billion transferred in Q4 2023 and RMB 500 billion transferred in Q1 2024.

Our take: This move was long expected, and is less stimulatory than the headline number suggests.

• Local government infrastructure spending was set to fall off a cliff in Q4, as local governments were required to issue all of their 2023 bond quotas by end-September and dispatch the funds by end-October.
• So rather than providing a fiscal surge, this move is meant to keep infrastructure investment steady throughout the rest of the year, and into Q1 2024.

Get smart: By couching the increase as a move to support post-disaster recovery – i.e. to address damage from “flooding, typhoons, and other natural disasters” – officials are continuing to signal they wish to maintain restraint in terms of significant new economic support.

• However, the case for more aggressive fiscal support in 2024 is clearly building within the policy debate.

Stay tuned: This was a late-breaking development, so we'll have more detail and analysis for readers tomorrow.