Recently, a highly anticipated package of incremental fiscal policies has been unveiled. Focusing on stabilizing growth, expanding domestic demand, and mitigating risks, fiscal policies have increased the intensity of counter-cyclical adjustments. A series of policy measures with significant strength and strong targeting have received high attention from society.

The "maximum effort" to resolve debt has been clarified. The Central Political Bureau meeting held on September 26 arranged for the effective implementation of existing policies and the introduction of incremental policies with greater force. It called for increasing the counter-cyclical adjustment intensity of fiscal and monetary policies, ensuring necessary fiscal expenditures, and effectively carrying out the "three guarantees" at the grassroots level.

At a recent press conference held by the State Council Information Office, Finance Minister Lan Fo'an announced that a series of targeted incremental policy measures would be introduced in the near future. In addition to the package of incremental fiscal policies that have already entered the decision-making process, Lan Fo'an clearly stated, "We also have other policy tools under study, such as the central finance still having a larger debt space and a deficit increase space."

The press conference released a strong signal that fiscal policy will increase the intensity of counter-cyclical adjustments.

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"The package of incremental fiscal policies aimed at 'stabilizing growth, expanding domestic demand, and mitigating risks' accurately responds to the current economic situation and social development needs, fully demonstrating flexibility and forward-looking nature, which is conducive to promoting the continuous improvement of the economy, and the continuous optimization of the economic structure," said Ma Haitao, President of Central University of Finance and Economics.

Yang Zhiyong, Director and Researcher of the Fiscal and Taxation Research Center at the Chinese Academy of Social Sciences, believes that "the press conference mentioned many times to increase the intensity of policies, reflecting the fiscal responsibility that should be undertaken. I believe that these policies will fully play their role after fulfilling the legal procedures and will actively promote high-quality economic development."

"The package of incremental fiscal policies reflects a positive response and long-term planning for the current economic situation. These measures focus on the three key areas of 'stabilizing growth, expanding domestic demand, and mitigating risks', releasing a positive signal to maintain the stable operation of the economy, improve people's welfare, and promote long-term sustainable development," said Li Xuhong, Vice President and Professor of the Beijing National Accounting Institute.

According to the arrangement, in order to alleviate the debt resolution pressure of local governments, in addition to continuing to arrange a certain scale of bonds in the newly added special debt limit every year to support the resolution of existing government investment project debts, it is planned to increase the debt limit by a large scale in one time to replace the local government's existing hidden debt, and to increase the intensity of supporting local debt risk resolution.

It is worth noting that this policy still needs to go through the legal procedures before making a detailed explanation to the society. Previously, on the basis of arranging more than 2.2 trillion yuan of local government debt limits for the central finance in 2023, 1.2 trillion yuan of limits were arranged in 2024 to support localities, especially high-risk areas, to resolve existing debt risks and clear arrears of enterprise accounts. The Ministry of Finance clearly stated that this increase in debt limits to replace local hidden debts is "the largest measure to support debt resolution in recent years", and its scale and intensity are worth looking forward to.Guohao Securities' Chief Economist, Xia Lei, believes that debt restructuring is a way to "unshackle" local governments, reducing their burden in a comprehensive manner across time, space, structure, and efficiency. Since the outbreak of the pandemic, local governments have faced significant pressure on rigid expenditures, with a large portion of fiscal revenue being used for debt service, leading to a "crowding out effect" on spending in public services, infrastructure, and other areas. Debt restructuring can enhance the fiscal sustainability and have an immediate effect on expanding domestic demand.

"Effectively resolving debt risks is beneficial for local governments to release more resources for investment in key areas and projects. This not only helps to improve economic efficiency and promote structural adjustments but also provides a solid guarantee for achieving high-quality development. It injects new vitality into the sustainable development of the local economy and further enhances the overall economy's ability to withstand risks. This is undoubtedly an important measure to address current economic challenges and ensure economic security and stable development," said Ma Haitao.

At present, the debt resolution work of local governments in China is progressing in an orderly manner, and the risks are generally controllable. Yang Zhiyong analyzed that on the surface, the local government debt balance does not change with debt restructuring, but the restructuring is a process of making implicit debt explicit, making debt information more transparent, which is conducive to decision-making. The restructuring process may also be accompanied by a decrease in debt interest rates and an improvement in the term structure. Necessary debt is beneficial to economic and social development; debt resolution is not about eliminating debt but about standardized management to make local debt management more regulated.

"The prevention and resolution of local debt risks address not only the normal operation of local finances but also greatly benefit the further activation of the market and the enhancement of the vitality of business entities. The replacement of implicit local debt means that many enterprises will obtain the funds needed for development, making a single move to activate the entire board, and the vitality of business entities will be more fully released, gradually forming a virtuous cycle. 'Look three steps ahead in chess', incremental fiscal policies also need to be viewed with a more systematic analysis method to truly feel the strength of fiscal policies," said Yang Zhiyong.

Supporting Banks and the Real Estate Market

Among a series of targeted incremental policy measures, "issuing special treasury bonds to support state-owned large commercial banks in replenishing core tier-one capital" has also attracted high market attention.

The Ministry of Finance stated that it will adhere to the principles of marketization and legalization, following the approach of "coordinated promotion, phased and batch implementation, and one bank, one policy," actively raising funds through channels such as issuing special treasury bonds to support state-owned large commercial banks in further increasing core tier-one capital in a prudent and orderly manner.

There have been precedents for using special treasury bonds to support large commercial banks in replenishing capital. In August 1998, the Ministry of Finance issued 270 billion yuan in special treasury bonds to the four major banks—Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, and China Construction Bank—on a one-time, targeted basis to replenish their capital.

Statistics show that as of the end of the second quarter this year, the capital adequacy ratio of large commercial banks was 18.31%, higher than regulatory requirements, and the six state-owned large commercial banks—Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications, and Postal Savings Bank of China—operated overall steadily. Experts believe that issuing special treasury bonds at this point to support state-owned large commercial banks in replenishing core tier-one capital is of great significance.

Xia Lei analyzed that capital not only affects regulatory indicators such as the capital adequacy ratio but also determines the macro prudential assessment (MPA) indicators for credit scale. In recent years, finance has continuously made concessions to the real economy, and the net interest margin of commercial banks has declined. Only by replenishing capital can the ability to sustainably expand credit in the future be enhanced. China's financial system is still mainly indirect financing, and state-owned large commercial banks, as systemically important financial institutions, play an important role in the stable operation of the entire financial system. Supporting state-owned large commercial banks in further increasing core tier-one capital can consolidate and enhance their steady operating capabilities."Replenishing the capital of state-owned large commercial banks can further enhance the ability of commercial banks to serve the real economy. With more funds available for credit, it is a timely rain for the entire economy and is conducive to promoting a more normal economic cycle," said Yang Zhiyong.

At the same time, the package of incremental fiscal policies clearly states the combined use of local government special bonds, special funds, tax policies, and other tools to support and promote the stabilization of the real estate market. The policy "combination punch" mainly includes allowing special bonds to be used for land reserves, supporting the acquisition of existing housing, optimizing the supply of affordable housing, and studying and clarifying value-added tax and land value-added tax policies that are connected with the cancellation of standards for ordinary and non-ordinary residences.

"The stable and healthy development of the real estate market is very important. A series of fiscal policies supporting the real estate market adapt to the requirements of building a new development model for real estate and meet the diverse and multifaceted housing needs of the people. Overall, it should be a direction of light taxation policies, making the cost of living in 'good houses' lower for the public. Special bond project funds for land reserves can make the operation of the real estate market more stable," said Yang Zhiyong.

Regarding the current issue of a relatively large amount of idle undeveloped land in various places, the Ministry of Finance has clarified that it supports local governments in using special bonds to repurchase eligible idle land and, where necessary, for additional land reserve projects.

Xia Lei believes that this measure can not only alleviate the problem of a lack of projects and idle funds for special bonds but also improve the efficiency of debt fund use. It is also beneficial for alleviating the liquidity and debt pressures of local governments and real estate companies, and promoting the efficient use of land resources.

Increase the intensity of livelihood security

The package of incremental fiscal policies also clearly states that it will increase support and protection for key groups. A one-time living subsidy has been distributed to people in difficulty before the National Day, and the next step will be to increase the support for students, enhance the overall consumption capacity, and increase the intensity of livelihood security.

This year, the central finance has allocated 66.7 billion yuan in employment subsidy funds to support local governments in promoting employment for key groups such as college graduates and vocational skills training. According to the overall national proportion of 3%, the basic pension level for retirees has been significantly increased, and the minimum standard for the basic pension of urban and rural residents has been greatly improved. In addition, the financial subsidy standards for basic public health services and the basic medical insurance for urban and rural residents have been increased. "Next, we will adapt to the changes in China's population development and the multi-level and diverse needs of the people, and further increase the expenditure in related fields to better benefit the people's livelihood," said Lan Fuan.

It is reported that the Ministry of Finance will work with relevant departments to adjust and improve the college student financial aid policy from two aspects: rewarding excellence and assisting the needy. The first step is to introduce the following policy measures in 2024: doubling the number of national scholarship reward places, increasing the reward standards for undergraduate scholarships, increasing the financial aid standards for undergraduate students, and increasing the support for national student loans. The second step is to increase the reward standards for graduate student academic scholarships in 2025. At the same time, it will also increase the financial aid standards for national student aid in ordinary high schools and increase the financial aid standards for national student aid in secondary vocational schools and expand the scope of assistance.

Li Xuhong analyzed that increasing support and protection for key groups such as people in difficulty and student groups can not only directly improve the living standards and educational opportunities of the beneficiaries but also help to improve overall consumption capacity and social stability."Ensuring and improving people's livelihoods is the top priority of policy, directly related to social harmony and stability. A package of incremental fiscal policies emphasizes increased attention to key groups, subsidies, affordable housing, and grassroots 'three guarantees', striving to solve the actual difficulties of the masses through a series of solid livelihood measures, and enhance the people's sense of gain, happiness, and security, which is a vivid practice of adhering to the people-centered development concept," said Ma Haitao.

Since the beginning of this year, the implementation of the proactive fiscal policy has been effective, effectively safeguarding the implementation of major national strategic tasks and promoting the overall stable and progressive economic operation. At the same time, whether this year's budget goals can be achieved has also attracted social attention. "China's finance has enough resilience, and by taking comprehensive measures, it can achieve a balance of income and expenditure and complete the annual budget goals," said Lan Fuan.