China steps up stimulus campaign

BEIJING – China pledged on Saturday to “significantly increase” debt to revive its sputtering economy, but left investors guessing about the overall size of the stimulus package, a vital detail to gauge the longevity of its recent stock market rally.
Finance Minister Lan Foan told a news conference that Beijing would help local governments tackle their debt problems, offer subsidies to people with low incomes, support the property market and replenish state banks’ capital, among other measures.
These are all steps investors have been urging China to take as the world’s second-largest economy loses momentum and struggles to overcome deflationary pressures and lift consumer confidence amid a sharp property market downturn.
But Lan’s omission of a dollar figure for the package is likely to prolong investors’ nervous wait for a clearer policy roadmap. That will not come until the next meeting of China’s rubber-stamp legislature, which needs to approve the issuance of new debt. A date has yet to be announced but it is expected in a few weeks.
“The strength of the announced fiscal stimulus plan is weaker than expected. There’s no timetable, no amount, no details of how the money will be spent,” said Huang Yan, investment manager at private fund company Shanghai QiuYang Capital Co in Shanghai.
Huang had hoped for more stimulus to boost consumption. Market analysts had been looking for a spending package that would range between 2 trillion and 10 trillion yuan ($283 billion to $1.4 trillion).
Saturday’s announcement “was strong on determination but lacking in numerical details”, said Vasu Menon, managing director for investment strategy at OCBC in Singapore.
“The big bang fiscal stimulus that investors were hoping for to keep the stock market rally going did not come through,” he said, adding this may disappoint some in the market.
Many key economic indicators in recent months have missed forecasts, raising concerns among economists and investors that the government’s 5% growth target this year was at risk and that a longer-term structural slowdown could be in play.
Data for September, which will be released over the coming week, is expected to show further weakness, but officials have expressed “full confidence” that the 2024 target will be met.
New fiscal stimulus has been the subject of intense speculation in global financial markets after the Politburo last month signalled an increased sense of urgency about the economy.
Chinese stocks reached two-year highs, spiking 25% within days after the meeting of the Communist Party’s top leaders, before retreating as nerves set in given the absence of further policy details.
Global commodity markets from iron ore to industrial metals and oil have also been volatile on hopes that stimulus will stoke sluggish Chinese demand.
Reuters reported last month that China plans to issue special bonds worth about 2 trillion yuan ($285 billion) this year as part of fresh stimulus.
Half of that would be used to help local governments tackle their debt problems, while the other half would subsidise purchases of home appliances and other goods as well as finance a monthly allowance of about 800 yuan ($114) per child to all households with two or more children.
Separately, Bloomberg News reported that China is also considering injecting up to 1 trillion yuan ($140 billion) of capital into its biggest state banks, though analysts say more lending would come up against stubbornly weak demand for credit.
The central bank in late September announced the most aggressive monetary support measures since the Covid-19 pandemic, including interest rate cuts, a 1-trillion-yuan liquidity injection and other steps to support the property and stock markets.
While the measures have lifted market sentiment, analysts say Beijing also needs to firmly address more deeply rooted structural issues such as boosting consumption and reducing its reliance on debt-fuelled infrastructure investment.
Most of China’s fiscal stimulus still goes into investment, but this leads to debt outpacing economic growth as returns are dwindling.
The International Monetary Fund estimates central government debt at 24% of economic output. But the fund calculates overall public debt, including that of local governments, at about $16 trillion, or 116% of GDP.
“There is still relatively big room for China to issue debt and increase the fiscal deficit,” said Lan.
Local governments still have a combined 2.3 trillion yuan to spend in the last three months of this year, including debt quotas and unused funds, he said. Municipalities will be allowed to repurchase unused land from property developers, he said.
Low wages, high youth unemployment and a feeble social safety net mean China’s household spending is less than 40% of annual economic output, some 20 percentage points below the global average. Investment, by comparison, is 20 points above.
Chinese officials have repeatedly pledged over the past decade to increase efforts to boost domestic demand, but made little progress on that front, which would require a fundamental structural rethink of many policies and institutions.