China’s looming fiscal package to stabilize rather than boost growth

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By Kevin Yao and Ziyi Tang

BEIJING- China’s planned fiscal package targets damaged property and local government balance sheets that weigh on the economy and fuel deflationary pressures, thus acting as a stabilizer rather than the instant growth booster markets craved.

Larger-than-expected monetary stimulus last month fueled unfettered investor speculation about a complementing, blockbuster fiscal program to immediately revive sagging economic activity.

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On Tuesday, Reuters reported that China is considering approving next week new debt issuance of more than 10 trillion yuan ($1.4 trillion) in coming years.

Some 6 trillion yuan will go chiefly towards lowering the off-books debt of municipalities, while 4 trillion will fund buybacks of idle land from cash-strapped developers and help reduce a giant inventory of unsold flats.

The measures in the works represent a more calibrated approach to stimulus, which is a departure from previous all-out strategies to revive growth.

In 2008, for example, China threw lavish resources directly at the infrastructure and property sectors to counter the effects of the global financial crisis.

“The primary goal of this stimulus is clearly more about shoring up balance sheets rather than boosting near-term GDP growth,” said Christopher Beddor, deputy China research director at Gavekal Dragonomics.

“It should ease the strains, but not necessarily generate instantly higher spending.”

This prudent approach is partly informed by the fact that China is now suffering from the excesses of previous stimulus. But it also leaves open questions about the impact the measures will have on short- and long-term growth.

That lingering uncertainty is reflected in financial markets, with Chinese stocks down about 0.5 percent on Wednesday, pulling other Asian markets lower.

“The package can be a painkiller, rather than a booster for the economy,” said Gary Ng, senior economist at Natixis. “The economic impact may not be as big as it looks on the surface.”

Still, a program worth more than 8 percent of the world’s second-largest economy’s gross domestic product (GDP) cannot be dismissed.

“It’s not just about quantity. It’s about providing a sense of stability,” said Zong Liang, chief researcher at state-owned Bank of China.

Local governments, facing high debt and falling revenues, have been cutting civil servants’ pay and other expenses. Property developers starved for cash have struggled to resume work on incomplete projects, hitting jobs and incomes.

China hopes to unclog the pipes that transmit money to businesses and consumers by shifting liabilities onto the central government’s healthier balance sheet, which only carries a debt load of 24 percent of GDP.

“Policymakers seem to sense that there’s a major liquidity squeeze right now unfolding among local governments, in large part due to the property downturn, leading many local authorities to stop paying their staff and corporate suppliers,” Gavekal’sBeddor said.

Tackling that squeeze releases resources into the real economy, but the impact may only show up in the second half of 2025, he added.

Another lingering question is whether the package merely postpones the debt crunch.

The International Monetary Fund calculates explicit local government debt at 31 percent of GDP at the end of 2023, that of their finance vehicles at a further 48 percent of GDP, and other government-related debt at another 13 percent.

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Add the central government’s debt and the total reaches 116 trillion yuan, the Fund estimates.

In the property sector, Goldman Sachs estimates the unsold real estate inventory, if fully built, would amount to 93 trillion yuan. – Reuters

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