Shenwan Hongyuan Group: What should we focus on after financial "front seat" positioning?

Shenwan Hongyuan Group released a research report stating that the broad fiscal expenditure growth rate in the first quarter of 2025 is 5.6%, exceeding the nominal GDP growth rate, and is also the best fiscal performance in the first quarter since 2023. It is worth noting that in April 2025, the year-on-year growth rate of broad fiscal expenditure rose to 12.9%, coupled with the continued active pace of fiscal bond issuance, it is expected that the expenditure growth rate in the second quarter will remain relatively high. As of the end of May, government bonds have net financed 6.3 trillion yuan, with a remaining 7.5 trillion yuan to be issued. Assuming that the government bond financing scale remains as planned, it is expected that net government bond financing will remain at a high level by the end of September. If economic recovery in the second half of the year still faces uncertainties, incremental policies may be implemented to smooth fiscal expenditure, ensuring the achievement of the annual economic targets. The main points of Shenwan Hongyuan Group are as follows: What is the most prominent feature of fiscal policy in 2025? The pace of broad fiscal expenditure from January to April reached 28.4%, higher than the five-year average (28.2%), demonstrating strong support for the economy from fiscal policy. The growth rate of broad fiscal expenditure in the first quarter of 2025 is 5.6%, surpassing the nominal GDP growth rate, and is the best fiscal performance in the first quarter since 2023. It is worth noting that in April 2025, the year-on-year growth rate of broad fiscal expenditure rose to 12.9%, and with the continued active pace of fiscal bond issuance, it is expected that the expenditure growth rate in the second quarter will remain relatively high. The growth of broad fiscal expenditure is not due to income improvement, with cumulative year-on-year broad fiscal revenue from January to April at -1.3%, lower than the budget target by 1.5 percentage points, mainly due to a decline in tax and land transfer revenue. During the same period, tax revenue decreased by 2.1% year-on-year, falling 5.8 percentage points below the initial budget target of 3.7%; non-tax revenue once again became the main source of stability for general public budget revenue. Meanwhile, land transfer revenue decreased by 11.4% year-on-year, a decrease of 119.6 billion yuan. The high growth of broad fiscal expenditure relies more on pre-issuance of government debt, especially the rapid issuance of national bonds. Net financing of government bonds from January to April was 4.8 trillion yuan, an increase of 3.6 trillion yuan year-on-year, becoming the core support for broad fiscal expenditure. As of May 24, 2025, the scale of national bond issuance has reached 42.7% of the budget target, far exceeding the average from 2020 to 2024. What is the future trend of fiscal policy? The fiscal policy in 2025 is more proactive, with an annual arrangement of government bond net financing scale reaching 13.86 trillion yuan. As of the end of May, government bonds have net financed 6.3 trillion yuan, with 7.5 trillion yuan remaining to be issued. Specific details of the new debt in 2025 include: a deficit of 566 billion yuan, super long-term special national bonds of 13 billion yuan, capital injections for special national bonds of 50 billion yuan, new special bonds of 440 billion yuan, and capital for debt repayment of 200 billion yuan, totaling an increase of 2.9 trillion yuan from 2024. Assuming that the government bond financing scale remains as planned, it is expected that net government bond financing will remain at a high level by the end of September. The Political Bureau meeting in April proposed to "accelerate the issuance and use of special bonds for local governments and super long-term special national bonds," which local governments are expected to implement in the future. Given the substantial increase in net financing of national bonds this year, the issuance pace may continue the trend seen since the beginning of the year. Overall, it is expected that the year-on-year increase in net government bond financing in the second quarter could reach 2.3 trillion yuan, while in the third quarter, it will remain at a historically high level (3.8 trillion yuan). If economic recovery in the second half of the year still faces uncertainties, incremental policies may be implemented to smooth fiscal spending and ensure the achievement of the annual economic targets. The Political Bureau meeting in April stated that "the sustained improvement in China's economy still needs to be further stabilized, and external shocks are increasing." Considering the uncertainties in the economic recovery in the second half of the year, fiscal policies may be timely and moderately implemented to smooth economic fluctuations and stabilize the growth rate of broad fiscal expenditure. What other policies can smooth out fluctuations in the second half of the year? Since 2022, policy tools and additional deficits have been put into practice. Extra-budgetary tools have the flexibility to respond swiftly to changes in the economy. The policy-oriented financial tools deployed at the Political Bureau meeting in April are expected to become effective means of smoothing economic fluctuations in the short term. Policy-oriented development financial tools have rapid deployment and strong fund leverage capabilities, which were fully demonstrated in practice in 2022. The first batch of 300 billion yuan was fully implemented within two months in 2022, followed by the second batch of 300 billion yuan, which was finalized within one month. On the other hand, intra-budgetary tools tend to be more responsive to dynamic changes in economic data, and they are applied with timely adjustments. While expanding deficits and adding special national bonds may require budget process compliance and have a relatively slower pace, their policy strength is more robust. The Political Bureau meeting in April proposed to "timely introduce incremental reserve policies according to changes in the situation." Based on current static calculations, the broad fiscal revenue is about 500-600 billion yuan below the target. If insufficient revenue affects the ability to support expenditure for nominal GDP, the fiscal policy may consider additional capital injections. In terms of where incremental funds are directed, service consumption, family planning policies, and infrastructure investment will be the core areas for ensuring fiscal stability and growth. In the consumption promotion sector, continuing to reduce financial burdens and increase household income is fundamental to boosting consumption. Improving income distribution mechanisms, strengthening social security, and implementing policies such as family planning subsidies will play a greater role. There is currently significant room for the recovery of service consumption, which urgently requires policy support, possibly focusing on extending actual vacation time for residents. In terms of investment, both new and existing infrastructure should be supported in tandem. Risk Warning Policy changes and economic changes may exceed expectations.