China's financial and fiscal policies have traditionally adhered to strict standards that align with internationally recognized thresholdsFor many years, the nation has maintained a close watch on various economic metrics, particularly concerning debt ratios and fiscal deficitsThe international standard sets an upper limit for debt ratios at 60%, and China has consistently kept its debt-to-GDP ratio within this capSimilarly, the country imposes a deficit ratio that rarely exceeds 3%, ensuring a cautious approach to fiscal governance.

When one compares China's stance with that of G7 nations, stark differences emergeCountries within the G7 have tended to adopt more flexible policies that reflect their unique conditions, often exceeding the international debt and deficit thresholds with significant margins

Given the current energy in international fiscal policy and the various challenges that China faces—such as economic slowdowns or structural shifts—there arises a pressing need for adaptive measuresLoosening fiscal policy within reasonable bounds appears not only necessary but strategically valid, urging a shift away from strict adherence to the former constraints on debt and deficits.

To illustrate, if China were to allow its debt ratio to rise to 80%, it could unearth considerable fiscal leewayWith GDP already hitting approximately 126 trillion yuan, an 80% debt ratio would provide a cushion of additional funding in the realm of several trillion yuan, thereby facilitating a more dynamic response to debt management and potential growth strategies.

A global benchmark comparison places Japan’s debt ratio over 200% and the United States at 140%. By contrast, China's current debt ratio presents a degree of room for increase

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According to national statistics, China's national debt stands around 30 trillion yuan, local government debt reaches 40 trillion yuan, and an estimated 14.3 trillion yuan is hidden (or implicit) debtThis gives a combined total debt of approximately 84.3 trillion yuan and a debt ratio of 67%. Raising this to 80% would unlock several trillion yuan in additional borrowing capacityTherefore, both in alignment with global practices and in tackling domestic challenges, the strategic elevation of the debt ratio has feasibility.

There remains the potential for optimizing the structure of national bond issuanceHistorically, China favored bonds with ten-year durations, but there is now an opportunity to explore longer terms of 30 to 50 yearsThis approach cleverly leverages financial instruments, effectively delaying the current challenges while allowing for a much-needed adjustment phase

The overarching aim is to create an environment conducive to fundamental economic recovery, thus addressing the root issues.

Looking at fiscal deficits, if China were to incrementally extend its deficit rate from just over 3% to 4.5%, it could create an additional space for 2 to 2.5 trillion yuan in funding allocations based on its GDP total of 126 trillion yuanThis indicates that there are avenues to investigate and exploit within the realm of deficits.

It is important to emphasize that these adjustments, viewed purely through a technical lens, may only serve as short-term remedies aimed at alleviating immediate pressuresThey are not definitive solutionsThe central aim is to buy valuable time, to broaden the space for maneuvering, and to create a favorable ecological environment that supports comprehensive economic recovery.

Discussion around the synchronization of fiscal and monetary policy is particularly relevant

Currently, the Chinese government is employing a combination of proactive fiscal policy and an accommodative monetary policy, distinctly different from past frameworks which often combined prudent fiscal measures with looser monetary policiesAs noted, fiscal policy expansions are focused on exploring pathways regarding debt ratio, deficit levels, and bond issuance structures; meanwhile, monetary policy initiatives are being aggressively implemented, particularly for the stock and housing markets, all while interest rates continue their downward trend.

A noteworthy development is the People's Bank of China's new measures introduced on September 24. Traditionally, fixed-income assets like government bonds and stocks have been treated as distinct, with banks rarely engaging in direct equity market investments

Reverse-cycle adjustments have largely relied on traditional monetary tools, such as the Medium-term Lending Facility (MLF) or the Standing Lending Facility (SLF), where commercial banks would use government bonds and other high-quality debt as collateral to secure liquidity from the central bank.

The pivotal reform on September 24 marks a breakthrough, with the central bank innovating interaction with three major financial sectors—banking, securities, and insurance—establishing convenient liquidity swap operations, the first round injecting a total of 800 billion yuanThese financial institutions can then use Exchange-Traded Funds (ETFs), index funds, and representative quality stocks as collateral to access more liquid funds in the form of debt securities from the central bank.

This shift capitalizes on the accumulated reserves of national bonds within Chinese banks over time, allowing the central bank to rejuvenate these assets