(Yicai) Oct. 14 -- China’s Ministry of Finance will increase the central government deficit to help local governments reduce their debt, replenish state banks’ capital, bolster the real estate sector and aid low income groups, as part of a bold fiscal stimulus package designed to lift confidence and spur the economy.

The government will significantly increase government borrowing to replace implicit debt in order to assist local governments solve their debt problems, it will sell bonds to supplement the capital of large state-owned banks to enhance their lending capacity, it will use special bonds and tax policies to stabilize the real estate sector and it will increase support for key groups to boost consumption, Finance Minister Lan Foan said at a press conference on Oct. 12.

The ministry has released a strong signal that the central government is in control and has the ability to solve problems such as local debt and grassroots financial difficulties, fiscal and tax experts told Yicai. It also shows that other tools can be implemented at any time depending on the economic and social situation.

The measures are quite strong and are in line with reasonable market expectations, they said. They follow a big economic stimulus drive rolled out last month by the People’s Bank of China and the central government.

The one-off lifting of the debt ceiling is the largest debt resolution effort made in recent years and exceeds market expectations, Ding Shuang, chief economist for China and North Asia at UK lender Standard Chartered Bank.

Some local governments have difficulty resolving hidden debts on their own, so the Ministry of Finance has increased the debt limit and will use government bonds to replace implicit debts, said Wen Laicheng, professor at the Central University of Finance and Economics. This approach aims to reduce the debt of local government financing platforms and lower potential default risks and regional fiscal and financial risks.

Details of the increased borrowing scale will be disclosed at a meeting of the National People's Congress later this month. It is expected that the hike will exceed the CNY2.2 trillion (USD310.9 billion) debt limit in 2023, and will not be less than CNY1 trillion, said Ding.

The Ministry of Finance will use special bonds to purchase existing housing for use as affordable homes, it said. It is studying the value-added tax and land VAT, that align with the standards of ordinary and non-ordinary residential properties. Next, further efforts will be made to increase support, adjust tax policies and promote the stable and healthy development of the real estate sector.

The use of special bonds to support land reserves and the acquisition of apartments for affordable housing, expands the scope of special bonds and is an important manifestation of fiscal support for the real estate market, said Luo Zhiheng, chief economist at Yuekai Securities. This will help improve the cash flow of property developers and mitigates their liquidity risks.

Future VAT preferential policies should ensure unified VAT treatment for both ordinary and non-ordinary residential properties, said Tian Zhiwei, deputy dean of the Institute of Public Policy and Governance of Shanghai University of Finance and Economics. This means that they should either be taxed according to standards for ordinary residential properties or enjoy tax exemption benefits.

Banks used to supplement their core tier-one capital from their profits, but their profits have been squeezed in recent years, experts told Yicai. So the ministry is stepping in and will issue special treasury bonds to supplement banks’ core tier-one capital. The specific amount of special treasury bonds to be issued has not yet been announced, but some experts expect it to be around CNY1 trillion (USD141.3 billion).

Editor: Kim Taylor