On October 12, the Information Office of the State Council held a press conference, at which Minister of Finance Lan Foan introduced the relevant situation of "increasing the counter-cyclical adjustment of fiscal policy and promoting high-quality economic development". From the perspective of policy content, it is almost the top policy support that can be given within the authority of the Ministry of Finance. What are the key signals from the launch? Jingtai interprets for you!

Interpretation 1: What incremental information will be given at this conference?

Shift from contractionary to expansionary finance

Expand fiscal expenditure: The planned fiscal deficit in 2024 will be 4.06 trillion yuan, an increase of 180 billion yuan over last year, the new local government special debt limit will be 3.9 trillion yuan, an increase of 100 billion yuan, and the issuance of 1 trillion yuan of ultra-long-term special treasury bonds, using the funds from the issuance of additional treasury bonds in 2023, will bring the annual public budget expenditure to 28.55 trillion yuan, maintain high expenditure intensity, and support high-quality development.

Optimize tax incentives: Implement structural tax reductions and fee reductions, continue to implement policies such as pre-tax deduction of R&D expenses, additional VAT deductions for advanced manufacturing industries, and tax exemptions for the transformation of scientific and technological achievements, and improve tax incentives for technological transformation of manufacturing enterprises. In the first eight months of this year, the main policies to support scientific and technological innovation and the development of the manufacturing industry have reduced taxes, fees and refunds by more than 1.8 trillion yuan.

Expand effective domestic demand: Supervise the rational use of funds from the issuance of additional treasury bonds by local governments to support post-disaster reconstruction and the improvement of disaster prevention and mitigation capabilities. We will do a good job in the issuance and use of ultra-long-term special treasury bonds, support the construction of national strategies and key areas, and promote the renewal of equipment and the trade-in of consumer goods. At the same time, we will strengthen the management of local government special bonds, expand the scope of applicable areas and the use of capital, and help local governments make up for shortcomings in key areas. In the first nine months of this year, 3.6 trillion yuan of new special bonds have been issued, supporting the construction of more than 30,000 projects and using more than 260 billion yuan as capital.

Interpretation 2: What logic has changed on the main line?

The central government has more room for leverage + the policy focus shifts to the demand side

First of all, the economy is in a period of transition and transformation between old and new drivers. secondly, non-economic factors such as the geopolitical environment, social incentives and confidence issues, as well as the impact of local governments on the business environment due to fiscal pressures; Finally, in the short term, there is an imbalance between macroeconomic supply and demand, which is manifested in insufficient aggregate demand and weak price signals.

This policy adjustment, by increasing the central government's leverage space and shifting the focus to the demand side, will help prevent local debt risk exposure, alleviate the lack of aggregate demand, and also help improve non-economic factors such as expectations and confidence, so as to alleviate some of the problems at the second and third levels mentioned in stages.

However, there are still several aspects that will take time to resolve: First, it is a persistent problem; second, non-economic factors such as incentives, as well as a geopolitical environment that is still fraught with uncertainties; Third, industrial transformation is a long-term process that takes time to achieve industrial upgrading.

Therefore, after this policy release, although the economic logic may have improved in the short term, and tail risks have been significantly mitigated, the momentum to promote economic growth still needs to be strengthened.

Interpretation 3: Impact on the economy?

Resolve tail risks and smooth the economic cycle

Debt resolution: reduce tail risks and smooth economic circulation. Although the debt does not bring incremental funds, it reduces the cost of debt through stock replacement and helps to reduce tail risk. Although the direct impact on the economy is limited in the short term, in the long run, reducing the debt burden can increase the motivation of local governments and promote a smoother economic cycle.

Bank capital injection: Strengthen financial support. Bank capital injections are incremental funding that aims to enhance the financial system's ability to support the real economy. This will help maintain banks' net interest margins, which in turn will boost credit disbursement. However, the effect will only be possible if the actual financing demand recovers.

Real estate market: both stock and increment. The measures of the real estate market include both the application of stock funds and the support of incremental funds, and its pulling effect is more obvious. Special bonds can be used for land reserve and the acquisition of stock commercial housing, and the funds for affordable housing projects are allowed to be used to digest the stock of housing, which not only solves the problem of lack of suitable projects for special bonds, but also can play a role to a certain extent. However, in view of the current high inventory of commercial housing, it will take some time from capital investment to the stabilization of housing prices, and depends on the support of demand-side policies and the recovery of residents' willingness to buy houses. Under the policy of "strictly controlling increments", it will also take a transition period from the stabilization of housing prices to the recovery of investment.

Interpretation 4: Impact on the market?

Equities are slightly positive, while debt performance is divergent

Stock market: Stable expectations and market sentiment. The central government's clear direction of leveraging, and the expectation of "larger" incremental funds, coupled with the existing funds to be implemented during the year and measures to stabilize the real estate market, will help stabilize market expectations and sentiment. With the valuation of the stock market returning to a reasonable range, the market has entered the second stage of verifying the policy of stabilizing growth. Investors need to pay close attention to the difference in expectations. Although the exact figure of the fiscal scale is still unclear, the sincerity and expectation space conveyed are generally positive. Commodity markets have also reacted positively.

Interest rate bonds: short-term defense. In the short term, due to the potential volatility of economic data and potential supply pressures, the interest rate bond market will be predominantly defensive, although the long-term logic of fundamentals has not changed. The improvement of economic data does not mean that the core contradictions will be resolved, and many non-economic factors and structural problems will still take time to resolve. Although there are measures to support the economic downturn, the upward momentum, especially the sustainability, still needs to be verified.

Fundamental analysis

From a fundamental point of view, the improvement in market expectations does not equate to a fundamental shift in the core contradiction. Many non-economic factors and structural problems will take time to resolve. The meeting stressed the importance of guiding local governments to prudently resolve hidden debt risks and promote the transformation of financing platforms. The accelerated replacement of implicit debt can be seen as reducing the debt burden of some transformation platforms and providing them with a time window for transformation. In the long run, the transformation platform may gradually divest its infrastructure business, clarify its relationship with local governments, and ultimately decouple from local credit. The market is likely to re-price such entities based on fundamentals.

Therefore, it is recommended to continue to pay attention to the path of existing debt disposal, business transformation progress, equity changes and financial subsidies of urban investment entities, so as to clarify whether the platform will continue to maintain the attribute of "urban investment" or move towards "industrial transformation".