On October 12th, the State Council Information Office held a press conference to introduce the "intensification of counter-cyclical fiscal policy adjustments and the promotion of high-quality economic development." In response to this meeting, the research team at Huaxin Securities pointed out that, overall, the additional policies focused on debt resolution, the replenishment of capital for major banks through special treasury bonds, and there was no explicit mention of increasing the deficit or using special treasury bonds to subsidize consumption. Most policies did not specify a particular scale, but used qualifiers such as "significant" (a significant increase in debt limits) and "the largest in recent years" (debt resolution), sending a somewhat positive signal. The known scale combination includes using 400 billion yuan of carried-over fiscal surplus from previous years for local debt swaps, plus additional local swap bond quotas, and a certain scale of special treasury bonds to supplement bank capital.
Huaxin Securities noted that in addition to tools that have entered the decision-making process, there are three other aspects to pay attention to: First, the increase in the deficit ratio may have to wait until 2025. The press conference mentioned that other policy tools are also under study, with examples involving a significant debt capacity and deficit increase space for central finance. The phrase "under study" rather than "in the decision-making process" implies that the increase in the deficit ratio may be discussed at the Central Economic Work Conference in December this year and implemented during the Two Sessions next year.
Second, the Ministry of Finance's response to whether the budget targets can be achieved is noteworthy. This year's budget revenue growth has not met expectations. In response to this issue, the press conference stated, "China's finance has enough resilience, and through comprehensive measures, it can achieve a balance of revenue and expenditure and complete the annual budget targets," indicating confidence and capability to achieve the budget targets. Part of this is that the fiscal revenue growth rate from January to August was lower than the budget, and if extrapolated linearly, the additional fiscal revenue and expenditure gap for the whole year is 1.28 trillion yuan; another part is that according to the budget report, local finance has调入资金及使用结转结余1.27 trillion yuan, which mainly came from the second account in previous years, and this year the land transfer income continues to decline, making it more difficult to调入资金. The corresponding combined fiscal gap limit is about 2.6 trillion yuan. The press conference mentioned "it is necessary to raise fiscal revenue in accordance with laws and regulations, and also to avoid over-taxation," but did not specify the method of raising funds, which may include moderately increasing the issuance of government bonds (the scale may be between 200-300 billion), increasing the transfer from the budget adjustment account (the central budget stability adjustment fund plans to transfer 248.2 billion, and may increase on this basis), and the disposal of local state-owned assets, among others.
Third, the use of funds from special bonds issued earlier may be slow. Huaxin Securities analysis pointed out that the press conference mentioned, "In terms of special bonds, with the remaining amount to be issued plus the funds already issued but not used, there are 2.3 trillion yuan of special bond funds available for use in the last three months of the year." As of October 17th, there is still 281.6 billion yuan of the new special bond limit to be issued this year, plus 400 billion yuan of the remaining limit (the press conference did not mention the specific type, which may not all be special bonds), which is less than 700 billion yuan to be issued. Even considering the possible additional swap of implicit debt limits within the year, assuming about 2 trillion yuan per year, there would be about 500 billion yuan in the fourth quarter of this year (which may not all be special bonds). This means that the funds from special bonds issued earlier but not used may exceed 1 trillion yuan (2.3 trillion minus 0.7 trillion, and then minus 0.5 trillion).
For the bond market, Huaxin Securities believes that the benefits of additional fiscal policies may be concentrated in credit, especially in the urban investment sector. Against the backdrop of the Ministry of Finance's "increased support for resolving local government debt risks," the repayment pressure on urban investment may be further reduced, and the alleviation of credit risks is conducive to further narrowing the spread. As for interest-bearing bonds, the short-term impact is mainly the additional supply at the end of the year. Summarizing the bond issuance signals released at the meeting, it is roughly 400 billion yuan of local bond limit carryover + special treasury bonds + additional swap bonds + potential deficit increase, and the scale of the latter three has not been announced. However, the additional supply is within the market's expectations, so the long-end interest-bearing bond market on that day was relatively calm, with only a slight increase of 0.2 and 0.5 basis points in 10-year and 30-year government bonds by the morning closing. The "fiscal answer" expected by the bond market in the fourth quarter may still need to wait for the Standing Committee of the National People's Congress in late October.
For the stock market, there are four aspects of this press conference worth noting. First, market sentiment may be supported. The press conference mentioned that "China's finance has enough resilience" and "central finance still has a large debt capacity and deficit increase space," which is conducive to the marginal stabilization of market sentiment and alleviates the risk of a sharp decline in the short term. At the same time, resolving local government debt risks is beneficial to enhancing local economic vitality, which may also have a supporting effect on the market. Second, issuing special treasury bonds to support large state-owned commercial banks in replenishing core tier-one capital. From historical experience, the issuance of special treasury bonds has a significant stimulating effect on the stock market. Combined with the recent implementation of "Securities, Fund, and Insurance Company Swap Facilities (SFISF)" to promote dividend stocks, there may be a repair momentum in the banking sector. Third, supporting and promoting the real estate market to stop falling and stabilize may have a supporting effect on the real estate and industry chain markets that have significantly回调ed recently. Fourth, increasing the intensity of awards and assistance for student groups may be another measure conducive to consumption after reducing the interest rates on existing mortgages. It is worth paying attention to the effect of policy implementation on stimulating residents' consumption tendencies and the subsequent performance of the consumer sector.