Highlights of the report

The policy level has decided that the fiscal policy in 219 will continue to exert efforts to stabilize growth, and the central bank has announced the RRR cut, and liquidity in the banking system has been supplemented. If the fiscal expenditure increases in the fourth quarter of 219, will the asset shortage situation change in the fourth quarter? Will the credit growth rate go up substantially? In view of the above problems, we believe that the possible fiscal expansion in the future can be "stable growth", but the current "asset shortage" problem has not been solved, and a large-scale rebound in credit growth is not expected.

if the fiscal expenditure increases in the fourth quarter of 219, will the asset shortage situation change in the fourth quarter? Will the credit growth rate go up substantially? This paper combs the practical experience of "fiscal-monetary" coordination around the world in detail. At present, China's "active finance" coincides with the central bank's RRR cut, so whether the credit growth rate can rebound in the fourth quarter has become a problem worthy of attention.

The global economy has entered a new normal of low-speed growth, which makes the global policy makers discover the limitations of monetary policy. The economic growth rate and risk-free interest rate in the United States, Europe, Japan and China have all declined, and the easing of monetary policy has never stopped. Looking back on the experience of the United States and Japan, "fiscal-monetary" coordination is helpful to support economic growth. It is the "fiscal-monetary" coordinated path of the United States and Japan to create aggregate demand through expansionary fiscal policy and expansionary monetary policy, and even through the central bank's direct purchase of government bonds. Observing the historical data of fiscal deficit and economic growth in the United States, we find that a single monetary stimulus is often ineffective.

Monetary policy encountered difficulties during the period when private sector economic activities were inactive, but China did not fully meet the conditions of "financial monetization". The problem of insufficient credit demand in the private sector plagues major economies. Therefore, the problem of "fiscal-monetary" coordination has begun to be valued by everyone. However, the conventional "fiscal-monetary" coordination relies more on the background of private sector deleveraging to avoid large-scale fiscal squeeze. China's current downward credit demand index and the gloomy financial data in the third quarter both show that China's credit promotion measures are unable to solve the credit demand problem, but at the same time, we are not sure that China's private sector has entered the deleveraging process, so the application of the theory of "money supporting finance" in China is debatable.

in the fourth quarter, the budget space is limited. There is no new content in the fourth quarter local debt issuance plan announced by several provinces. Secondly, if the government chooses to increase leverage financing in the fourth quarter, it will face a certain "crowding out effect". Fiscal policy expansion can provide consumption and investment demand for the economy in the period of weakening aggregate demand, but if the commitment of fiscal expansion is temporary, the purchase of fiscal expansion in the current period will change the intertemporal decision-making of the private sector and trigger the "crowding out effect" of finance. Finally, active financial projects need to solve the problem of credit matching. Although both local debt issuance and fiscal expenditure have been in the forefront since 219, due to insufficient participation of social funds, infrastructure investment is still difficult to improve significantly, which is one of the main reasons for the current high increase in special debt and weak infrastructure and economy.

bond market outlook: we believe that if fiscal expansion is to be realized in the fourth quarter, fiscal policy needs to be exerted on local projects. However, the income side is under pressure on budget space and bond issuance balance, and the participation enthusiasm of social capital is also a major difficulty. First of all, the fiscal budget space in the fourth quarter is limited; Secondly, if the government chooses to increase leverage financing in the fourth quarter, it will face a certain "crowding out effect"; Finally, active financial projects need to solve the problem of credit matching, but the coverage of projects with special debts as project capital is not extensive. We believe that the high probability of wide fiscal change in the fourth quarter will not change the situation of lack of high-quality assets, and the judgment of credit demand is still neutral, and we still attach importance to observing the judgment of 13% credit growth rate (calculated from the RRR cut). To sum up, we maintain the previous judgment that the yield to maturity range of 1-year treasury bonds is 2.8%~3.2%.

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On September 4th, the Finance Committee meeting proposed that "financial departments should continue to do a good job in supporting the issuance of special bonds by local governments"; At the same time, an executive meeting was held in the State Council, and it was clearly put forward that "the new amount of special debt for next year will be issued in advance according to regulations to ensure that it can be used early next year". The policy level has decided that the fiscal policy in 219 will continue to exert efforts to stabilize growth. At the same time, the central bank has announced the RRR cut, and liquidity in the banking system has been supplemented. Observe the relationship between the growth rate of public expenditure and the growth rate of credit: the growth rate of national government fund expenditure, the growth rate of public expenditure and the growth rate of credit seem to have a certain correlation recently. Then, in recent years, the hot issue of "fiscal-monetary" coordination in the international scope is worth studying (the success of "fiscal-monetary" coordination in the period of weak demand makes the relevant discussions hot, including blanchard's "public debt and low interest rate" and Bernanke's "helicopter money" theory. This also makes some voices think that with the strong support of financial investment, credit is expected to rebound in the fourth quarter.

if the fiscal expenditure increases in the fourth quarter of 219, will the asset shortage situation change in the fourth quarter? Will the credit growth rate go up substantially? We believe that: first of all, the deficit space in the fiscal budget in the fourth quarter of 219 is limited, and the amount of local special debts borrowed outside the budget is also limited. There is some resistance for the government to increase leverage significantly in the fourth quarter; Secondly, if the economy is stabilized in the fourth quarter through government leverage and financial projects, government leverage will cause the crowding-out effect of bank asset allocation; The effect of financial projects needs attention, but it still needs to solve the problem of low participation of social funds. We believe that the possible fiscal expansion in the future can "grow steadily", but it still has not solved the current problem of "asset shortage", and a large-scale rebound in credit growth is not expected.

why are you concerned about "fiscal-monetary" coordination?

The global economy has entered a new normal of low-speed growth, which makes the global policy makers discover the limitations of monetary policy. The economic growth rate and risk-free interest rate in the United States, Europe, Japan and China have all declined, and the easing of monetary policy has never stopped. Japan, the United States and the European Union have hit the lower limit of zero interest rate, but the economy has not resumed long-term growth. Subsequently, the Federal Reserve's quantitative easing action, the Bank of Japan's QQE+YCC (quantitative and qualitative monetary easing+yield curve control) and the European Central Bank's asset purchase plan did not work obviously, and the simple monetary policy seemed to be ineffective. The nominal interest rate, which is lower than the economic growth rate for a long time, also makes the cost of issuing bonds continuously diluted, and the economic stimulus led by fiscal expansion seems to become more and more profitable.

Looking back on the experience of the United States and Japan, the "fiscal-monetary" coordination is helpful to support economic growth. It is the "fiscal-monetary" coordinated path of the United States and Japan to create aggregate demand through expansionary fiscal policy and expansionary monetary policy, and even through the central bank's direct purchase of government bonds. Observing the historical data of fiscal deficit and economic growth in the United States, we find that a single monetary stimulus is often ineffective: the United States only has a "fiscal-monetary" synergy of interest rate reduction policy and a large federal deficit after the outbreak of the subprime mortgage crisis in 27, while Trump's tax reduction plan in 217 encountered the tax increase cycle of the Federal Reserve, which made this round of fiscal stimulus not achieve a sustained economic rebound.

Japan has always been at the forefront in terms of "finance-currency". In order to raise Japan's inflation and reform Japan's economy, Japanese Prime Minister Shinzo Abe shot "three arrows" in December 212-bold monetary policy, flexible fiscal policy and economic reform. Although the "Abenomics's Three Arrows" are effective, and every round of fiscal relaxation will also bring about an upward trend in economic growth, Japan has not given up its efforts to normalize its finances so far. This political repetition makes the stimulus ineffective: the Japanese government announced that Japan would increase the consumption tax rate from 8% to 1% on October 1, which once again increased residents' anxiety about Japan's economic prospects and began to dispel the previous fiscal expansion efforts.

Monetary policy encountered difficulties during the period when private sector economic activities were inactive, but China did not fully meet the conditions of "financial monetization". Traditional monetary policy means (continuous interest rate reduction and repurchase) or unconventional monetary policy (asset purchase plan and QE) can supplement the funds in the banking system, but cheap credit supply does not mean credit growth. The problem of insufficient credit demand in the private sector plagues major economies. Therefore, the problem of "fiscal-monetary" coordination has begun to be valued by everyone. However, in the conventional sense, "fiscal-monetary" coordination (fiscal policy is driven by the purchase of bonds by monetary authorities) relies more on the background of private sector deleveraging to avoid large-scale fiscal extrusion. China's current downward credit demand index and the poor financial data in the third quarter all show that China's credit promotion measures (micro-credit promotion and LPR reform) have some problems in the face of credit demand, but at the same time, we are not sure that China's private sector has entered the deleveraging process, so the application of the theory of "money supporting finance" in China is debatable.

can fiscal expansion in the fourth quarter stimulate credit?

We believe that if fiscal expansion is to be realized in the fourth quarter, it may be necessary for the fiscal sector to exert its strength on local fiscal projects. However, the revenue side is under pressure on the budget space and the balance of bond issuance, and the participation enthusiasm of social capital is also a major difficulty.

in the fourth quarter, the budget space is limited. "Fiscal-monetary" coordination requires fiscal policy to directly increase government expenditure with the support of monetary policy, but China's current budget deficit balance is not much: the NPC Financial and Economic Committee approved the fiscal deficit of the central government budget in 219 to be 2.76 trillion yuan, and by August, the fiscal deficit had reached 218 million yuan, leaving only 58 billion yuan. For the extra-budgetary part, according to the data of the Ministry of Finance, among the 36 places (i.e. provinces, autonomous regions, municipalities directly under the Central Government and cities with separate plans) that have issued creditor's rights, Beijing, Liaoning, Dalian, Shanghai, Zhejiang, Ningbo, Fujian, Jiangxi, Guangdong, Shenzhen, Guangxi, Sichuan, Xinjiang and Xiamen have completed the task of issuing new bonds this year. According to the data of the government's fourth quarter bond issuance schedule published by various provinces, many provinces, including Ningxia, Sichuan and Zhejiang, have not yet added special bond issuance content. Therefore, even if the 22 special debt is issued in advance in the fourth quarter, the total debt may be limited.

If the government chooses to increase leverage financing in the fourth quarter, it will face a certain "crowding out effect". Fiscal policy expansion can provide consumption and investment demand for the economy in the period of weakening aggregate demand, but if the commitment of fiscal expansion is temporary, the purchase of fiscal expansion in the current period will change the intertemporal decision-making of the private sector and trigger the "crowding out effect" of finance ("Ricardo equivalence"). On September 24th, President Yi Gang said that "China cherishes the normal monetary policy space and is not eager to follow the massive interest rate cuts or quantitative easing policies of other central banks". Because China's money supply mechanism is still centered on banks, and the path of central bank releasing reserves and bank repurchasing bonds is different from the "fiscal-monetary" coordinated path of the United States and Japan, the two cannot be directly compared: because the bank's allocation behavior will crowd out the bank's credit, observing the data since 214, we can find that the interest rate bonds held by banks are negatively correlated with the loan balances year-on-year, and the crowding-out effect is more obvious in the recent period when the reserve of the banking system is relatively insufficient. Similarly, observe the relationship between the leverage ratio of government departments in China and the growth rate of various loans: since the second half of 217, there has been an obvious negative correlation between them-at present, the process of government leverage in China has indeed put some pressure on the growth rate of credit. Therefore, we believe that the income from increasing the scale of debt in the fourth quarter of finance is small, and the probability of occurrence is also small.

active financial projects need to solve the problem of credit matching. Our previous topic "bond market enlightenment series 219814-can the silent infrastructure be revived?" It has been pointed out that although both local debt issuance and fiscal expenditure have been in the forefront since 219 (although the expenditure is slower than the issuance, which will be described later), due to insufficient participation of social funds, infrastructure investment is still difficult to improve significantly, which is also one of the main reasons for the current high increase in special debt and the weakness of infrastructure and economy. Since the beginning of 219, fiscal deposits have always maintained a high position, which is the performance of financial expenditure: social funds are unwilling to participate, so credit demand is naturally impossible to talk about.

special debt as project capital is a favorable policy for credit, but it is not widely covered at present. In June 219, the Notice on Doing a Good Job in the Issuance of Special Bonds by Local Governments and Supporting Financing for Projects clarified that special bonds can be used as capital for major projects; In September, the Standing Committee of the National People's Congress explicitly expanded the projects in which special bonds can be used as capital to 1 fields. Since the projects involved in special bonds are often of good qualifications, this policy is undoubtedly a big plus for credit supply. However, according to 21st century business herald, at present, there are 9 projects in China that use special debt funds as capital, with a total amount of only 6.8 billion yuan. Overall, the coverage of this model is still not wide. Secondly, as of September 219, the supply of new local special bonds issued by * * * nationwide was 2,129.73 billion yuan, which has basically reached the issuance target set at the beginning of the year. However, the process of raising the limit of new special debt this year is complicated and the income is relatively limited. Therefore, we expect that "issuing some special debt limits in advance" does not mean that there will be a large amount of new special debt in the fourth quarter. It is expected that there will be little room for extra-budgetary finance in the fourth quarter.

At the same time, at present, China's residential sector and enterprise sector are in the process of slowly increasing leverage and marginal deleveraging. The financial efforts from 219 to now do not seem to significantly drive the increase of private sector expenditure, and the crowding-out effect may be more dominant, which may indicate that the background of private sector deleveraging required for the "fiscal-monetary" synergy to take effect may not have appeared in China. To sum up, we believe that the possible fiscal expansion in the future can "grow steadily", but the current "asset shortage" problem has not been solved, and a large-scale rebound in credit growth is not expected.

Prospect of the bond market

We have combed the practical experience of "fiscal-monetary" coordination around the world in detail, and at present, it coincides with the emergence of "active finance" in China and the RRR cut by the central bank, so whether the credit growth rate can rebound in the fourth quarter has become a problem worthy of attention. We believe that if fiscal expansion is to be realized in the fourth quarter, fiscal policy needs to be exerted on local projects: however, the income side is under pressure on budget space and the balance of bond issuance, and the participation enthusiasm of social capital is also a major difficulty. First of all, the fiscal budget space in the fourth quarter is limited; Secondly, if the government chooses to increase leverage financing in the fourth quarter, it will face a certain "crowding out effect"; Finally, active financial projects need to solve the problem of credit matching, but the coverage of projects with special debts as project capital is not extensive. We believe that the high probability of wide fiscal change in the fourth quarter will not change the situation of lack of high-quality assets, and the judgment of credit demand is still neutral, and we still attach importance to observing the judgment of 13% credit growth rate (calculated from the RRR cut). To sum up, we maintain the yield to maturity range of 1-year national debt in the previous judgment at 2.8%~3.2%.