China signals an anticipated package to revive the economy without disclosing its size
In an anticipated move to boost China’s struggling economy, China announced on Saturday its intent to “significantly increase debt,” without providing any details on the size of the stimulus package, leaving investors in suspense about how this action will impact the recent stock market recovery.
Finance Minister Lan Fuan explained during a press conference that Beijing will take measures to help local governments address their debt issues, provide financial support to low-income households, support the real estate sector, and strengthen the capital of state-owned banks. These are steps long-awaited by investors closely monitoring the slowdown in China’s economy amid deflationary pressures and declining consumer confidence due to the real estate crisis.
However, the absence of details on the expected size of the stimulus package has raised concerns among investors, who may have to wait until the Chinese legislative body convenes to approve the issuance of additional debt. The date for this meeting has not been set, but it is expected to take place in the coming weeks.
Vasu Menon, Executive Director of Investment Strategy at OCBC Bank in Singapore, described the press conference as demonstrating “strong resolve but lacking in numerical specifics,” which may disappoint some hoping for a large stimulus package to maintain stock market momentum.
In recent months, China has seen a series of economic data fall below expectations, heightening fears that the government’s 5% growth target for this year is at risk, with the possibility of long-term economic stagnation. Despite expectations that September data may show further weakness, officials expressed “full confidence” in achieving the 2024 growth target.
Talk of a new stimulus package has sparked widespread speculation in global financial markets, following a political meeting in September that stressed the urgent need to revive the economy. Chinese stocks surged to their highest level in two years, with a 25% increase, but later declined amid concerns about the lack of further details from officials.
Reports indicate that China plans to issue special sovereign bonds worth 2 trillion yuan (about $284.43 billion) this year as part of the new fiscal stimulus. Half of this amount will be allocated to help local governments resolve their debt issues, while the other half will be used to support consumer goods purchases and provide financial subsidies to families with children.
Additionally, reports suggest that China may inject up to 1 trillion yuan into major state-owned banks, though analysts believe that weak credit demand will limit the effectiveness of this measure.
In late September, China announced a series of its most significant monetary measures since the COVID-19 pandemic, including interest rate cuts and a 1 trillion yuan liquidity injection to support real estate and stock markets.
However, analysts believe that Beijing needs to address deeper structural problems hindering the economy, such as boosting domestic consumption and reducing reliance on debt-funded investment. Much of China’s fiscal stimulus continues to go toward infrastructure projects, which are increasing debt at a faster rate than economic growth.
According to the International Monetary Fund, central government debt is equivalent to around 24% of GDP, while total public debt, including local government debt, is around $16 trillion, or 116% of GDP. Lan added that local governments have 2.3 trillion yuan to spend in the remaining three months of the year, including debt quotas and unused funds.
Low wages, rising youth unemployment, and a lack of a social safety net remain key challenges that hinder household spending, which accounts for less than 40% of China’s annual GDP, compared to a global average of around 60%.
Lan affirmed that reforms would come “step by step,” while experts believe the current focus is on addressing fiscal deficits and local government debt risks, which may not be enough to alleviate the deflationary pressures facing the country.
