China is set to approve its largest fiscal stimulus package since the pandemic, totaling around $1.4 trillion, or 10 trillion yuan, in an effort to stabilize its $18 trillion economy.
Facing the pressures of a slumping real estate sector, rising local government debt, and shaky consumer confidence, Beijing is moving to address core vulnerabilities in its $18 trillion economy.
However, questions remain over whether this package will be enough to calm markets and restore confidence in China’s long-term economic health.
Deep issues in China’s economy
The Chinese economy has struggled to regain momentum post-pandemic, hampered by a significant downturn in the real estate sector and record-high levels of local government debt.
China’s largest real estate company, Evergrande, was ordered this year to liquidate $300 billion in assets, raising the first flags in the country’s real estate sector.
Many local governments, previously reliant on land sales as a revenue source, are now burdened by debts that have stretched their fiscal limits, impairing their ability to respond to economic pressures.
To address these issues, China’s government plans to issue special sovereign bonds and local government bonds, designed to ease the debt load and recapitalize major state banks.
The allocation of funds under this package will prioritize stabilizing local government debt and ensuring that banks have the capacity to extend more credit to the economy.
The structure of the $1.4 trillion package
According to recent data, the Xi Jinping administration plans to allocate about 10 trillion yuan over the next three years, with 6 trillion yuan ($840 billion) aimed at reducing local government debt.
An additional 4 trillion yuan ($560 billion) is designated for shoring up the real estate sector.
This package will likely be approved by China’s National People’s Congress (NPC) this week and will involve a significant issuance of special bonds.
While the total figure is impressive, the real test lies in where and how these funds are deployed.
The strategy is aimed at stabilizing the property market, providing relief to local governments, and ensuring that banks can continue to lend at low interest rates.
Is the focus on debt going to be enough?
Instead of prioritizing direct cash infusions for consumer spending, China’s fiscal stimulus is heavily weighted toward refinancing local government debt and enabling banks to support businesses.
This approach may ensure greater long-term financial stability, but it could have limited impact on immediate growth.
Local governments, for instance, have been compelled to reduce spending as revenues from land sales plummet.
Additionally, they face restrictions on taking on new debt due to the government’s “hidden debt” crackdown, aimed at containing off-balance-sheet borrowing.
By bringing local government debt onto the official books, this stimulus package seeks to lower interest costs and provide regions with greater financial breathing room.
However, by choosing debt stabilization over direct consumption, the stimulus could fall short of delivering an immediate economic boost.
Consumer spending remains a question mark
While infrastructure and real estate have traditionally played major roles in China’s economic recovery strategies, many economists argue that a stronger focus on consumer spending is essential for a sustainable rebound.
With a population of 1.4 billion and a GDP per capita of just $13,000, China faces a unique challenge in driving domestic consumption at scale.
Stimulating household spending could serve as a stabilizing force, yet the government remains hesitant to implement large-scale direct subsidies, given the costs involved.
This caution stems partly from China’s high savings rate and lack of a targeted social support system.
Source: Bloomberg
Beijing has avoided rolling out substantial direct subsidies for households, wary of the financial burden such measures would impose.
Instead, upcoming policy meetings in December and March may provide more clarity on whether direct consumer support will eventually be introduced.
Could US election outcomes affect China’s Strategy?
Should Republican nominee Donald Trump be elected, China could face increased tariffs on its exports, creating further pressure to shift focus toward stimulating domestic consumption.
This scenario might push Beijing to implement stronger measures targeting consumer demand earlier than initially planned.
Analysts anticipate that a Trump win may result in a stimulus package 10-20% larger than under a Harris win.
China’s future economic policies will likely be influenced by the US administration’s trade stance, which could shape the urgency and scale of China’s domestic demand policies.
How does the market feel about China’s plans?
The measured rollout of this stimulus has already led to uncertainty in the financial markets.
A significant push in September aimed at encouraging lending and stabilizing stock and property markets resulted in brief optimism, but investors are still not convinced.
They’re now watching this week’s NPC meeting closely, hoping for indicators of further fiscal support, including whether Beijing will raise debt ceilings or adjust deficit targets to allow for additional regional spending.
Some analysts suggest that the central government may eventually need to ramp up fiscal support for consumer spending, especially if it wants to maintain growth beyond the current 5% target.
While the NPC’s decisions this week may offer some insight, the December Politburo meeting and the annual Central Economic Work Conference are key dates for any updates on fiscal policy, as these gatherings will likely shape China’s economic priorities for the coming year.
No room for errors
This $1.4 trillion package, focused on restructuring local government debt and recapitalizing banks, leaves little room for errors.
With GDP growth expected to hover near 5% this year, Beijing’s main priority is meeting its growth targets without overextending its fiscal capabilities.
The debt restructuring program for local governments, while beneficial for long-term financial stability, may have limited impact on immediate economic demand.
Likewise, directing much of the stimulus toward debt-laden banks could slow the economic boost that policymakers hope to achieve.
Without a more significant push toward consumer support, the stimulus may have only limited effects on household spending.
Restoring consumer confidence will be essential for a stronger economic rebound, especially if domestic consumption is to take a more central role.
For now, much of the market’s focus is on the outcomes of the NPC’s ongoing session, but analysts are also closely watching the upcoming December Politburo meeting and the March full session of the NPC.
With much of the fiscal package aimed at debt relief and the financial sector, these later meetings may provide clearer signals on how China intends to stimulate household demand directly.
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