A Trading Playbook on Japanese FX Intervention

Economic

Forex

Summary:

Yen falls 7% this year to hit lowest levels in three decades…

Yen tanks, again

The Japanese yen absorbed heavy damage this year, briefly falling to a 34-year low against the US dollar. Selling pressures persisted even after the Bank of Japan raised interest rates out of negative territory, leading authorities in Tokyo to threaten another round of FX intervention to defend the currency.

Several factors lie behind the yen’s collapse. First and foremost is the wide interest rate gap between Japan and the United States. Despite the Bank of Japan’s historic move, rate differentials are still extremely wide. As such, capital continues to flow out of Japan, searching for higher returns abroad.

Rising oil prices have been another thorn in the yen’s side, hitting the energy-importing currency through the trade channel. The euphoria in stock markets has further suppressed demand for the safe-haven Japanese currency.

What is the roadmap for FX intervention?

With Tokyo warning it could take action, it’s useful to examine the language officials have used in the past before intervening, and how those threats escalate before actual intervention takes place.

A Trading Playbook on Japanese FX Intervention_1

In Japan, the decision to intervene falls on the government, while the execution is done by the central bank. The speed of currency moves is extremely important in deciding whether to intervene. Authorities are more concerned about sharp and sudden FX moves, as those threaten economic stability.

So Japan is more likely to resort to intervention if the yen depreciates at a rapid clip, like it did back in 2022. If the currency is losing ground but at a very slow pace, the risk of intervention would be much lower.

Before actually intervening, Japanese officials will often escalate their verbal warnings in an attempt to scare away speculators that are shorting the currency. This ‘verbal intervention’ process has several unofficial stages.

Stage 1:

We are monitoring developments in the currency market
Desirable for FX rates to move in line with economic fundamentals

Stage 2:

Rapid FX moves can have negative effects on the economy
Excessive movements in exchange rates are undesirable
Carefully monitoring FX markets with a sense of urgency

Stage 3:

Recent moves are driven by speculation and don’t reflect fundamentals
Won’t rule out any options to combat disorderly currency moves
Yen losses have been “excessive” or “disorderly”

Stage 4:

Prepared to take “decisive” or “bold” action against speculative moves
Ready to act against “one-sided” and “excessive” currency moves
“Bank of Japan calls FX dealers to check exchange rates”

The finance minister is the final authority in intervention matters, so when these warnings come from him directly, their importance is greater. We currently seem to be in Stage 4, as finance minister Suzuki recently stressed the government is willing to take “bold measures against excessive moves”. This was his strongest warning so far.

Options market suggests intervention is not imminent

Language aside, the options market doesn’t seem very concerned about an immediate intervention. Implied volatility in short-dated USDJPY options remains fairly low, which shows that big investment funds are not panic hedging against any massive yen moves.

Therefore, options traders seem to view FX intervention as a low-probability scenario for now, perhaps because the speed of depreciation has not been as dramatic as in 2022, when Tokyo intervened twice.

A Trading Playbook on Japanese FX Intervention_2

Similarly, the fact that the Bank of Japan hasn’t “called FX dealers to check yen quotes” suggests authorities are not quite ready to take action yet. Of course, that could change if USDJPY slices through the 152.00 region and moves higher rapidly.

The risk of intervention would rise significantly in this case, although Tokyo might still refrain from pulling the trigger unless the pair goes all the way up to the 155.00 – 156.00 area. A lot will also depend on the rally’s momentum. The faster the move, the more likely intervention becomes.

Even if Tokyo steps in, it’s doubtful whether that would lead to a trend reversal in the yen as wide rate differentials would continue working against the currency. Hence, intervention might prevent deeper losses, but is unlikely to ignite a lasting rally in the yen.

Ultimately, the yen needs the global economy to weaken and foreign central banks to start slashing interest rates, before it can stage a sustainable recovery.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Samantha Luan

Cryptocurrency

Bitcoin enthusiasts often argue that one of the digital currency’s many virtues is its ability to act as a safe haven asset, fulfilling the role that gold has traditionally played.

But bitcoin’s claim to be the equivalent of digital gold, which holds its value as government-issued currencies lose their purchasing power, has been thrown into question by the events of the past month.

Gold prices soared to an all-time high of $US2295 a troy ounce in trading on Wednesday night, as investors hunted for ways to protect themselves against stubbornly high inflation and the risk of escalating conflict in the Middle East.

Gold’s allure as a safe haven has seen its price climb 11.5 per cent so far this year.

The latest rally – up more than 4.3 per cent over the past five days – comes as US share- and bond markets have faced selling pressure while investors worry that stubborn inflation will prevent the US Federal Reserve from delivering three interest rate cuts this year.

On Wednesday, Fed chairman Jerome Powell struck a cautious tone, arguing that robust US economic data hadn’t changed the US central bank’s broad expectation that falling inflation would allow for interest rate cuts this year.

Still, he cautioned that the Fed’s job of taming inflation was “not yet done”, and the central bank needed “greater confidence” that price pressures were ebbing before it cut interest rates.

What’s been remarkable about gold’s latest rally is that it has taken place during a period when investors have sharply revised their expectations of extensive rate cuts.

Gold prices began their latest ascent amid hopes that the US central bank was on the verge of cutting interest rates, which would push US bond yields and the US dollar lower. Gold, which offers no yield to investors, tends to rise when interest rates fall.

But the precious metal continued to climb sharply this week as investors fretted that the strength of the US economy, along with rising oil prices, would entrench inflationary pressures, limiting the scale of Fed rate cuts. Investors, it seems, are now seeking out gold as an inflation hedge.

There are other factors propelling the gold price higher, including buying from some countries which are keen to diversify their financial reserves, and reduce their exposure to the US dollar.

The most prominent is China, where the country’s central bank, the People’s Bank of China, has been steadily increasing its exposure to gold. This has encouraged buying from Chinese consumers, who are purchasing record levels of gold.

At a time when China’s property market is under severe pressure, and its sharemarket is languishing, Chinese households are increasingly funnelling their savings into gold.

Bitcoin lags

In contrast, bitcoin and other cryptocurrencies have largely moved in tandem with the US sharemarket.

Bitcoin, the largest digital currency, hit a record high near $US74,000 in mid-March but struggled to consolidate at that level. Instead, the cryptocurrency has endured a series of volatile corrections, followed by abrupt recoveries.

Bitcoin’s weakness has coincided with declines in other risk assets. The US sharemarket has faltered, with both the Dow Jones Industrial Average and S&P 500 retreating from their own all-time highs as US bond yields have climbed to their highest levels in months.

This suggests that rather than acting as a safe haven, cryptocurrencies are extremely sensitive to investor risk sentiment, which has been dealt a blow this week as rate cut hopes have dimmed.

All the same, bitcoin enthusiasts point out that although the digital currency may be volatile, it has significantly outperformed traditional safe haven assets such as gold and US government bonds over the past four years of turmoil, which have witnessed a global pandemic and an inflationary surge.

Source：Financial Review

Risk Warnings and Disclaimers

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FastBull Featured

Daily News

[Quick Facts]

1. Makoto Sakurai says the BOJ may wait until fall before raising rates.

2. Kugler says it's appropriate to lower interest rates this year.

3. Powell is still not confident enough about a sustained fall in inflation.

4. U.S. services growth slows, price index falling to a four-year low.

5. Oil prices may rise to $100 a barrel if OPEC+ extends production cuts.

6. U.S. ADP employment rebounds beyond expectations in March.

[News Details]

Makoto Sakurai says the BOJ may wait until fall before raising rates

The Bank of Japan (BOJ) may wait until October before considering whether to raise interest rates again after successfully negotiating the tricky task of abandoning its massive stimulus program, former BOJ policy board member Makoto Sakurai said. Policy normalization will likely begin next year, with perhaps a 25bp rate hike every six months.

There will be no bold action this fall, and the transition to normalization will begin in 2025, provided the economy performs well.

On the issue of the yen's decline leading to a greater likelihood of taking action, Makoto Sakurai said that as the U.S. is less likely to raise rates again, the decision will be made by the Ministry of Foreign Affairs of Japan unless the dollar rises above 160 against the yen.

Kugler says it's appropriate to lower interest rates this year

Fed Governor Kugler said in a speech on Wednesday that inflation may slow further this year, but not at a significant cost to employment or economic growth, which creates the conditions for interest rate cuts.

Weak consumer spending should help slow economic growth, slower than last year's strong 3.1%, and demand for workers is also slowing. As demand growth cools and against a backdrop of solid supply, my basic expectation is that a further slowdown in inflation can be achieved without a sharp rise in the unemployment rate. If the slowdown and labor market conditions develop as I expect, it would be appropriate to cut policy rates this year.

Powell is still not confident enough about a sustained fall in inflation

Federal Reserve Chairman Jerome Powell said on Wednesday that policymakers will wait for clearer signs of falling inflation before considering a rate cut. Although the recent inflation data was higher than expected, it did not materially change the overall situation. With regard to inflation, we are not certain at this point whether the recent data is merely a temporary fluctuation. We do not think a rate cut is appropriate until we are more confident that inflation is moving consistently toward 2%. Treasury yields continued to rise after Powell's remarks, and the S&P 500 also gained. Based on pricing in the futures market, investors broadly expect the first rate cut to occur in June and believe there may not be three rate cuts this year.

U.S. services growth slows, price index falling to a four-year low

The U.S. ISM non-manufacturing PMI fell by 1.2 to 51.4 in March, slowing for the second consecutive month. It largely reflects that the supplier delivery index has dropped to a record low. The non-manufacturing price index fell by more than five points to 53.4, its lowest level since March 2020. This contrasts with the ISM manufacturing data. The services price data could ease market concerns that the Fed's progress on inflation may be stalling.

Oil prices may rise to $100 a barrel if OPEC+ extends production cuts

As expected by the market, OPEC+ did not recommend any changes to its production cuts at its Wednesday's meeting, despite the price of Brent crude climbing to $90. This paves the way for a tight market and further oil price increases in the coming months. If anyone thought the recent rise in oil prices would incentivize Saudi Arabia and its allies to ease the supply crunch, this meeting will disabuse them of that thinking.

Oli prices around $90 are exactly what the Saudis and their allies want. Traders next will keep an eye on the upcoming OPEC+ ministerial meeting in June. Whether or not OPEC decides to extend production cuts into the second half of the year will be a key factor in determining whether oil prices can reach $100 a barrel.

U.S. ADP employment rebounds beyond expectations in March

The U.S. March ADP employment report showed that jobs increased by 184,000, exceeding the expected 150,000 and the previous 140,000.

Data showed that job growth was strong in almost all sectors, but employment in professional services declined. After several months of steady deceleration, job stayers' wages grew steadily at 5.1%. Meanwhile, wage growth for laborers who changed jobs rose sharply to 10%, increasing for the second consecutive month.

Although the ADP data did not see a material change, it showed a relatively strong job growth of 184,000 jobs. Coupled with the impact of the upward revision of February's data, U.S. economic growth expectations have been strengthened. Moreover, the job openings and factory orders data were better than expected, the solid performance of economic data leads to decreased market expectations for the Fed's interest rate cuts this year.

In addition, what surprised the market was not only the wage growth, but also the industries that recorded wage growth. Construction, financial services and manufacturing industries saw the largest increases in the number of people changing jobs. Inflation has been cooling, but the data shows that wages in both the goods and services sectors are rising, which is not good news for inflation.

[Focus of the Day]

UTC+8 14:30 Swiss CPI (Mar)

UTC+8 20:30 U.S. Jobless Claims

UTC+8 19:30 ECB March Monetary Policy Meeting Minutes

UTC+8 22:00 Philadelphia Fed President Harker Participates in a Fireside Chat

Risk Warnings and Disclaimers

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Cohen

Economic

Political

The United States government has been recently seeking to deploy a whole host of coercive industrial policy measures to try and prevent the further economic development of China. However, for specific political reasons, which we will shortly examine, this coercive industrial policy has been couched in the language of U.S. national security.

The current round has principally involved export controls on semiconductors. These include restrictions on both the sale of high-end chips, concerning artificial intelligence and related areas, and chip making equipment, including extreme ultraviolet (EUV) lithography systems as well as many variants of them. The expectation of the United States government was that these measures would ensure that the technological gap in semiconductors between the United States and China would remain sufficiently large.

Before examining the results of these export controls, let us examine the purposes underlying these coercive measures. First, the "national security" dimension behind these export controls is completely misplaced both in terms of fact and relevance. China is already in possession of the threshold type of requisite semiconductor chips and their production capacity for its national security purposes. However, by highlighting the ostensible national security concerns of the United States, a public narrative has been created within which the governments of countries "allied" with it could be coerced into falling in line with the demands of the U.S. government.

However this public narrative seeks to prevent them falling in line with the dictates of the U.S. government as being rightly interpreted as a loss of their strategic autonomy, that would have adverse domestic consequences in these countries.

Second, and more relevant, is the anxiety of the U.S. government that it is losing its near monopoly on some types of high technology and therefore its ability to earn monopoly profits on commodities produced by such technologies. It needs to be emphasized that American firms operating within the territory of the United States do not have the ability to produce high-end semiconductors in significant scale. Semiconductor companies in the United States earn their monopoly profits principally, but not exclusively, through their provision of driver software for these chips, but this is declining in significance as alternatives are developed. The United States is trying to get high-end semiconductor manufacturing companies to set up in its territory by "inviting" such companies from East Asia. But the overall state of manufacturing, infrastructure and skilled labor in the United States is unlikely to make these ventures internationally significant in terms of market share in the semiconductor sector.

Third, these export controls on semiconductors also make it transparent that the U.S. government's incantation about free trade is merely a public narrative underlying two processes. One, the industrial policy of the United States in disguise but fortified by export controls has always been at work. This industrial policy is employed to try to initially achieve and then seek to maintain its technological lead over other countries. And secondly, it is trying to weaken the ability of governments of other countries from practising what the United States is itself undertaking. But these governments who are being compelled to effectively abandon indigenous technological advancement are able to "rationalize" their actions in terms of their adherence to this incantation. As the industrial policy of the United States has become transparent, the lustre of this invocation has tended to fade.

However, the results of the export controls on semiconductors have been underwhelming. Since the onset of these export controls, China has rapidly ascended the technological ladder through indigenous innovation, resulting in the technological gap in semiconductors becoming largely irrelevant. Unlike the United States, China has a meaningful presence in virtually every segment of the semiconductor value chain and therefore its technological advancement in this sector is sustainable. Each such technological attainment by China has resulted in the government of the United States trying to "strengthen" its export controls; but such export control measures are unlikely to be successful, as demonstrated by the history of failed initiatives in this regard.

The government of the United States has to come to terms with the fact that high technology that includes semiconductors is no longer capable of being monopolistically profited from. The Australian Strategic Policy Institute in a report published in 2023 documented that China's technological lead over the United States extends to 37 out of 44 areas, including robotics, energy, biotechnology, artificial intelligence, advanced materials, and quantum technology. Therefore, it is not surprising that private firms operating in the semiconductor sector, in the United States and elsewhere, have publicly stated that it is not possible to contain China technologically. They are also bearing the brunt of the export controls of the United States government since this has resulted in a fall in sales to China, which is more often than not their principal market.

As China further ascends the technological ladder, the decline of these firms belonging to the United States will become permanent. Unless the U.S. government reverses course, its role in a world where high technology is more widely diffused across countries, will become increasingly marginal.

Source：cgtn

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Zi Cheng

Economic

Stocks

US Equity Markets: ADP Employment, ISM Services PMI, and Fed Chair Powell

On Thursday, overnight US economic data and Fed speeches will influence investor appetite for the Asian equity markets.

According to the ADP, nonfarm payrolls surged 184k in March after a 155k increase in February. However, the services sector expanded at a less marked pace. The all-important US ISM Services PMI fell from 52.6 to 51.4 in March.

Fed Chair Powell offered market relief from the ADP Report, stating that inflation figures from last week didn’t materially alter the Fed’s view. Powell stuck to the FOMC press conference script, adding that the Fed would begin cutting rates this year.

10-year US Treasury yields pulled back from a Wednesday session high of 4.429%, ending the session down 0.09% to 4.349%. On Wednesday, the Dow declined by 0.11%. The Nasdaq Composite Index and the S&P 500 saw gains of 0.23% and 0.11%, respectively.

Asia Economic Calendar: The Aussie Economy in the Spotlight

On Thursday, the Australian economy will be in focus. Building permits and finalized retail sales figures could support bets on the RBA shifting toward a more dovish rate path.

The numbers will unlikely influence buyer appetite for Nikkei-listed stocks. Nikkei-listed export stocks will likely remain in the hands of the Japanese government and intervention chatter.

Commodities: Crude Oil, Gold, and Iron Ore Price Trends

Commodity price trends can influence both market risk appetite and the ASX 200.

Crude oil and gold prices were higher on Wednesday. However, SGX TSI Iron ore saw losses and could pressure mining stocks.

The USD/JPY, the Intervention Zone, and the Nikkei

On Thursday, there will be no escaping the impact of USD/JPY trends on the Nikkei. On Wednesday, the USD/JPY ended the session at 151.688. Investors expect a break above the 152 barrier to force the Japanese government to intervene. The threat of a stronger Yen will continue to influence Nikkei-listed stocks.

The Futures Markets

On Thursday, the ASX 200 and the Nikkei were up 26 and 470 points, respectively. There is no trading of Hang Seng Index-listed stocks. The HK Markets are closed for the Ching Ming Festival.

ASX 200

The ASX 200 slid by 1.34% on Wednesday, following the US equity markets into negative territory.

Tech stocks tumbled on shifting sentiment toward a June Fed rate cut. The S&P ASX All Technology Index (XTX) ended the session down 2.81%. Bank, gold (XAU/USD), and mining stocks contributed to the losses. Oil stocks had a mixed session despite the overnight gains in crude oil prices.

ANZ Group Holdings Ltd. (ANZ) and Commonwealth Bank of Australia (CBA) slid by 1.53% and 1.88%, respectively. National Australia Bank Ltd. (NAB)and Westpac Banking Corp. (WBC) saw losses of 1.12% and 1.07%, respectively.

BHP Group Ltd (BHP) and Fortescue Metals Group Ltd. (FMG) declined by 0.60% and 0.90%, respectively. Iron ore prices retreated on the Singapore futures exchange, impacting buyer demand for mining stocks. However, Rio Tinto Ltd. (RIO) bucked the trend, gaining 0.38%.

Gold (XAU/USD) stocks Northern Star Resources Ltd. (NST) and Evolution Mining Ltd (EVN) fell by 1.15% and 0.53%, respectively.

Woodside Energy Group Ltd (WDS) gained 0.03%, while Santos Ltd (STO) slipped by 0.13%.

Hang Seng Index

On Wednesday, the Hang Seng Index fell by 1.22%. Property and tech stocks contributed to the losses. The Hang Seng Tech Index (HSTECH) and Hang Seng Mainland Properties Index (HSMPI) declined by 2.32% and 1.56%, respectively.

Tencent (0700) and Alibaba (9988) fell by 0.26% and 0.92%, respectively.

Bank stocks also had a negative session. HSBC (0005) declined by 0.81%. China Construction Bank (0939) and Industrial Commercial Bank (1398) saw losses of 0.62% and 0.51%, respectively.

The Nikkei 225

The Nikkei ended the Wednesday session down 0.97%. The USD/JPY hovered below the 152 level, testing buyer appetite for Nikkei-listed export stocks. Intervention threats remained.

Bank stocks steadied after heavy losses at the start of the week. Sumitomo Mitsui Financial Group Inc. (8316) and Mitsubishi UFJ Financial Group Inc. (8306) saw gains of 1.92% and 1.07%, respectively.

It was a mixed session for the main components of the Nikkei.

Fast Retailing Co. Ltd. (9983) slid by 3.34%, with Softbank Group Corp. (9948) declining by 1.24%.

Sony Group Corporation (6758) and KDDI Corp. (9433) saw losses of 0.19% and 0.65%, respectively.

Tokyo Electron Ltd. (8035) bucked the trend, advancing by 0.03%.

Source: FX Empire

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Zi Cheng

Commodity

Gold prices surged to an all-time high on Wednesday as traders responded to signals that the US Federal Reserve was preparing to cut interest rates later this year even as inflation remained stubbornly above the central bank’s target.

The haven asset has rallied 15 per cent since mid-February after gaining 0.6 per cent to touch $2,295 a troy ounce on Wednesday, also boosted by concerns over the potential for an escalating conflict in the Middle East.

Two Fed officials said on Tuesday that three interest rate cuts this year would be “reasonable”, even though the world’s largest economy continues to perform strongly, with consumer prices rising slightly in February. Gold, which offers no yield to investors, tends to benefit from a fall in so-called real interest rates — borrowing costs adjusted for inflation.

“The expectation for falling real rates remains an important driver for the bullish outlook on gold,” said Joni Teves, a precious metals analyst at UBS. “As long as the Fed stays dovish, there is a risk of even larger declines in real rates should inflation surprise on the upside.”

Analysts said that traders were buying gold — known as an inflation hedge — to protect themselves against the risk of a rise in inflation, which would push real rates lower.

Source: Financial Times

Brent crude, the global oil benchmark, has crept up about 18 per cent since the middle of February to reach almost $90 a barrel, fuelling anxiety about a rebound in inflation.

“The market is interpreting that the Fed is willing to accommodate higher inflation as it cuts rates,” said Michael Widmer, commodities strategist at Bank of America.

Gold extended its gains despite Fed chair Jay Powell saying that the central bank’s job in bringing down inflation was “not yet done”.

Investors are starting to pay increasing attention to gold as a protection mechanism against concerns about high US debt levels, something that will be a focus in the run-up to the presidential election this year, according to Widmer.

Gold’s rally had been given further impetus by investors buying call options in the futures market, aiming to profit from a rally driven by voracious demand from central banks and Chinese consumers, who are snapping up gold at record levels.

Analysts also said that Israeli strikes on an Iranian consulate in Syria had further burnished gold’s appeal as a haven.

“Strength begets strength,” said Robin Bhar, an independent precious metals consultant. “[Gold] seems to be in the hands of the speculative traders who are piling in and wanting to see this thing move much higher.”

Gold remains a significant distance from its real terms all-time high from 1980, equivalent to more than $3,000 a troy ounce after adjusting for inflation.

However, some analysts caution that gold’s surge from more than $1,800 a troy ounce six months ago looks overdone, particularly given the risk that the Fed and other big central banks lower interest rates more slowly than expected because of high inflation.

“The US economy is surprising with its strong performance, which would make a first interest rate cut in June less likely and thus weigh on the gold price,” said Alexander Zumpfe, senior precious metals trader at Heraeus, a refinery of precious metals. But he added that “it seems as if gold turns every market development into a price increase”.

Source: Financial Times

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Alex

Economic

Chinese local governments are gearing up for another tough year and coming to terms with the new normal of frugality amid growing pressure on fiscal revenue and efforts to tackle their debt burdens.

In his first government work report to the annual session of the National People’s Congress, the country’s top legislature, in March, Premier Li Qiang told government officials to get used to tightening their belts, echoing a call in December by top leaders when they spoke of the growing pressure on budgets at their annual Central Economic Work Conference.

“Prestige and vanity projects and wasteful and excessive spending will be strictly prohibited,” Li said. “Governments at every level must get used to keeping their belts tightened, run on lean budgets, and ensure that fiscal funds are used where they are needed most and to the best effect.”

While all 31 provincial-level regions on the Chinese mainland reported positive growth in fiscal revenue last year, mainly thanks to a weak outturn in 2022 when Covid-19 hit economic activity, many localities are not optimistic about the outlook for 2024.

Growing fiscal strain

Other than Jiangxi and Shanxi provinces, all other regions have set their forecasts of growth in their general public budget revenue for this year lower than last year’s actual growth. Most are projecting increases of 3% to 6%, Caixin’s analysis of provincial budget forecasts shows, although five are aiming for growth around or above 7%.

The general public budget comprises the vast majority of local government revenue and spending, and raises most of its funds from taxation.

“The fiscal situation is set to come under greater strain in 2024 and it will become more challenging to strike a balance between revenue and spending,” Han Jie, director of the Beijing Municipal Finance Bureau, told a meeting of the city’s legislature in January, pointing to pressure on last year’s revenue from the sluggish property market and declining profit in the banking sector.

The budget report from the government of Zhejiang province, one of China’s biggest economic hubs, warned that the tax base has yet to resume its normal growth trajectory and forecast its general public budget revenue will grow by just 5% this year.

Tepid consumer demand and weakening confidence in the overall economic recovery are also weighing on local authorities’ fiscal revenue growth. In its budget report, the government of Hunan province warned that “social expectations are weak,” and that households and businesses are increasingly cautious about spending on big-ticket items or investing in production expansion.

On top of those headwinds, the slump in land sales revenue, previously a major source of fiscal revenue for local governments, has exacerbated the strain on budgets.

Last year, land sales revenue fell 13.2% nationwide to around 5.8 trillion yuan ($823 billion), the second straight annual decline. Of the 28 provincial-level regions that had disclosed the data as of Feb. 23, 22 reported a drop, with nine logging slumps of more than 20%, according to analysis by Luo Zhiheng, chief economist at Yuekai Securities Co. Ltd.

Frugality Bites for China’s Cash-Strapped Local Governments_1

Tackling local governments’ explicit debt, which exceeded 40.7 trillion yuan at the end of 2023, and their hidden debt, estimated to be as high as 70 trillion yuan by some analysts, is also a top priority. Much of the hidden debt is owed by local government financing vehicles (LGFVs). Besides bringing the hidden liabilities onto local budgets, the interest burden on the borrowings is growing and a mountain of debt repayment is looming.

LGFVs have 4.65 trillion yuan worth of bonds due this year, according to data compiled by Bloomberg, the highest amount on record, and roughly 13% more than what came due in 2023.

To help ease the pressure on their budgets, local governments have little option but to cut back on general expenditure, which covers things like meetings, exhibitions and official trips, to ensure they have enough money to spend on what’s known as mandatory expenditure. This includes the “three guarantees” — ensuring basic livelihoods, wages, and the authority’s daily operations.

Thirteen provincial-level regions said spending on people’s livelihoods is taking up at least 70% or 80% of their budgets. To ensure they have enough money, some local governments are scrapping or suspending investment in certain types of project. Top of the list are unprofitable investments and those aimed at burnishing the political image of local officials, such as exhibition halls, local budget reports show.

Twelve provincial-level regions that are identified as high-risk in terms of their debt burdens have been told to suspend new investment in infrastructure projects unrelated to people’s basic livelihoods and review ongoing ones until their debt risks are reduced to moderate or low levels, according to new guidelines issued by the State Council, China’s cabinet, that took effect on Jan. 1.

A local official from one of those 12 regions told Caixin that the local counterpart of the National Development and Reform Commission has classified government investment projects into three key categories: banned new projects, projects that should be supported, and those that require further review and approval. The policy is partly aimed at preventing localities from investing in vanity projects that may boost GDP but fail to deliver tangible economic gains.

Some local authorities are exploring new ways to raise money. Shandong province and the municipalities of Tianjin and Chongqing have said they are studying changes to reform the state-owned capital operations budget, one of the four budgets in the fiscal system and that manages the revenue from and expenditure on state-owned enterprises (SOEs). Among the options are increasing the percentage of their annual profits SOEs must pay to local governments, and expanding the scope of profits to be handed over.