China to use ultra-long bonds for consumption as retail sales slump

SHANGHAI — China on Thursday announced its most targeted measures yet for boosting consumption, which has remained lackluster since the Covid-19 pandemic.

Authorities announced they would allocate 300 billion Chinese yuan ($41.5 billion) in ultra-long special government bonds to expand an existing trade-in and equipment upgrade policy. The document was jointly published by the National Development and Reform Commission — China’s economic planning agency — and the Ministry of Finance.

“There have never been such specific measures” aimed at consumption, Bank of China’s chief researcher Zong Liang said in a phone interview Thursday, according to a CNBC translation of his Mandarin-language remarks.

He noted how the new policy links Beijing’s ultra-long bond program — announced in March — with consumption.

“This is a very important measure for implementing the Third Plenum,” Zong said. He was referring to a high-level meeting of Chinese leaders last week that only occurs twice every 10 years, and which typically sets the tone for economic policy.

The latest Third Plenum concluded with the release of several major guiding documents over the past weekend that reaffirmed Beijing’s long-term interest in bolstering advanced tech. The official communique focused on “deepening reform.” It also said China would work to achieve its full-year national targets, but disappointed many analysts by not indicating major policy changes.

Policymakers have started to act in the last week. The People’s Bank of China unexpectedly cut interest rates on Monday, amid other changes, and on Thursday cut its medium term facility lending rate.

The National Development and Reform Commission on Thursday then announced the expanded policy to support consumption.

“The move is a three-birds-with-one-stone action: Spurring consumption, absorbing industrial output, and [solidifying] economic growth to meet the pledged target of 5%,” said Bruce Pang, chief economist and head of research for Greater China at JLL.

The policy at least doubles the subsidies for new energy and traditional fuel-powered vehicle purchases to 20,000 yuan and 15,000 yuan per car, respectively.

The measures subsidize a range of equipment upgrades, from those used in farming to apartment elevators. Officials noted Thursday that about 800,000 elevators in China have been used for more than 15 years, and that 170,000 of those had been used for more than 20 years.

The policy also laid out specific subsidies for home renovations and consumer purchases of refrigerators, washing machines, televisions, computers, air conditioners and other home appliances. The document said each consumer could get subsidies of up to 2,000 yuan for one purchase in each category.

In allocating the roughly 300 billion yuan in ultra long-term bonds for local government to use for the subsidies, the policy noted the central government would take back any unused funds by the end of 2024.

“This means they’re stressing the money must be spent,” Zong said. He noted that the 300 billion yuan designation also reflects “a new way of thinking” which can have impact at scale.

The measures are coming at a time in which China’s consumers have been unwilling to spend, partly due to uncertainty about future income and the real estate slump.

China’s retail sales grew at a slower 2% year-on-year pace in June, which Zong said “was not ideal.”

Concerns about China’s lackluster consumer spending have recently gained a higher profile in a country where public discussion can be tightly controlled.

Trip.com co-founder James Liang this month called for Beijing to issue consumption vouchers, according to “The East is Read” newsletter that cited Liang’s post on Chinese social media platform WeChat. The same publication pointed out that Li Yang, head of the National Institution for Finance & Development (NFID), in late May highlighted China’s declining consumption.

China reported retail sales growth of 3.7% in the first half of the year, slower than the 8.2% pace recorded in the year-ago period.

That means “the pressure on spurring consumption is rather large,” Liu Xiaoguang, a professor at the Academy of Development and Strategy at China’s Renmin University, said in a presentation to reporters Thursday, according to a copy seen by CNBC. That’s according to a CNBC translation of the Chinese.

Liu noted that the housing market has yet to reach a clear turning point, and it would take time for one to solidify.

But he said with China’s recently announced plans for “deepening reforms,” the economy could grow by 5.3% this year, versus 5.1% without such measures.