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China Flags More Fiscal Stimulus for Economy, Leaves Out Key Details on Size

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China announced plans to “significantly increase” debt to revive its economy, but withheld crucial information regarding the overall size of the stimulus package. This leaves investors uncertain about how long the recent stock market rally will last. At a press conference on Saturday, Finance Minister Lan Foan detailed measures aimed at alleviating local government debt, offering subsidies to low-income citizens, supporting the struggling property market, and replenishing state banks’ capital. However, no specific figures were provided.

Investors have been eagerly awaiting more aggressive action as the world’s second-largest economy faces mounting deflationary pressures, low consumer confidence, and a sharp property market downturn. The absence of a specific monetary figure for the stimulus prolongs market uncertainty. Economists and analysts are especially concerned as economic data in recent months has consistently underperformed, raising fears that China’s 2024 growth target of approximately 5% may be difficult to achieve.

Lack of Details Raises Investor Concerns

While Lan emphasized the government’s resolve to tackle the economy’s challenges, the lack of detailed numbers frustrated investors hoping for a comprehensive stimulus package to sustain the recent market rally. “The big bang fiscal stimulus that investors were hoping for… did not come through,” said Vasu Menon, managing director for investment strategy at OCBC in Singapore. The rally in Chinese stocks, which saw a 25% surge after the September Politburo meeting, has since slowed, and concerns about the absence of policy clarity are growing.

China’s property market remains a key issue, with falling demand and heavy debts hanging over local governments. In September, Reuters reported that China plans to issue special sovereign bonds worth around 2 trillion yuan ($284.43 billion), with half of the funds directed at local governments and the other half toward consumer subsidies and household benefits, such as an allowance of 800 yuan ($114) per child for families with two or more children. Meanwhile, Bloomberg reported China is considering injecting 1 trillion yuan of capital into state banks to stimulate lending, though demand for credit remains weak.

Central Bank Interventions and Structural Issues

The People’s Bank of China has already introduced its most aggressive monetary measures since the COVID-19 pandemic, including rate cuts and a liquidity injection of 1 trillion yuan. These measures have lifted market sentiment somewhat, but analysts argue that China needs more profound reforms to boost consumption and shift away from its reliance on debt-driven infrastructure investment.

Despite years of pledges to increase domestic consumption, household spending remains weak. Currently, consumption accounts for less than 40% of China’s annual GDP, significantly below the global average, while investment remains far higher than global norms. These imbalances highlight the need for structural reforms in policies and institutions if China is to achieve sustainable growth.

Lan’s press conference did little to quell concerns, with analysts warning that without targeted measures to boost demand and investment, China may struggle to ease deflationary pressures. “There is still relatively big room for China to issue debt and increase the fiscal deficit,” Lan said, noting that local governments have 2.3 trillion yuan left to spend in the final quarter of the year. However, deeper reforms are expected to be announced gradually.

Uncertain Path Forward

As markets await more concrete details, global investors are left speculating on China’s next moves. The upcoming meeting of China’s National People’s Congress, which is expected to approve additional debt issuance, may finally provide clarity. Until then, volatility in Chinese markets and global commodity prices is likely to continue, as investors try to gauge the impact of China’s fiscal policies.

China’s Local Government Debt Problems Are a Hidden Drag on Economic Growth

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China’s persistent consumption slowdown is increasingly linked to the country’s real estate slump, which has deep financial ties to local governments and their growing debt. Over the past two decades, much of Chinese household wealth was funneled into real estate, but since Beijing began cracking down on developers’ high reliance on debt in 2020, property values have fallen. This has, in turn, cut into local government revenues, especially from land sales—a crucial source of funding.

According to analysts at S&P Global Ratings, local government finances may take three to five years to recover, but delays in revenue recovery could exacerbate the already growing debt levels. Wenyin Huang, director at S&P Global Ratings, highlighted how macroeconomic challenges continue to weaken the revenue-generating capacity of local governments, particularly when it comes to taxes and land sales. Over the last two or three years, the drop in land sale revenues and tax cuts dating back to 2018 have further reduced operating revenue by an average of 10% across China.

Local governments are scrambling to reclaim lost revenue, putting additional strain on businesses already hesitant to expand or raise wages amid ongoing economic uncertainty. This pressure has led to an increase in back-tax collection efforts, with some companies reporting notices to repay taxes for operations dating back decades. These unexpected financial demands have further damaged fragile business confidence, with the CKGSB Business Conditions Index reflecting a contraction in August.

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In an effort to diversify revenue streams, certain provinces such as Jiangsu, Shandong, Shanghai, and Zhejiang have seen non-tax revenue growth exceeding 15% in 2024. However, this shift has done little to alleviate the underlying challenges. Camille Boullenois, an associate director at Rhodium Group, noted that the aggressive tax collection “shows how desperate [local governments] are to find new sources of revenue.”

The Chinese government has denied any widespread or targeted tax inspections but acknowledged that local governments have issued notices in compliance with existing laws. Despite these claims, the strain on local government budgets remains evident, as essential services like education and civil servant salaries cannot be cut, leaving limited room to reduce spending.

Efforts to spur growth by pivoting toward consumption-based models have struggled to take hold. Analysts have pointed out that the investment-led approach is not delivering the desired nominal GDP growth, which is contributing to higher debt ratios. Since 2021, China’s debt-to-GDP ratio has risen by 30 percentage points, reaching 310% in the second quarter of 2024, and is projected to rise further by year-end. Growth, meanwhile, is expected to lag behind the official target, with GDP projected to rise by just 4.5% in the third quarter, shy of the government’s 5% goal.

Local government financing vehicles (LGFVs), which have taken on substantial debt for public infrastructure projects, now pose a significant risk to the banking sector. Experts like Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, believe LGFVs are an even greater risk than the real estate sector, describing them as a “grey rhino” — a metaphor for high-probability, high-impact risks that are being ignored. Chinese banks are now more exposed to LGFV loans than to real estate developers, creating a precarious situation for the financial system.

S&P Global Ratings’ Laura Li warned that while the government is trying to manage liquidity issues to maintain stability, there are no quick fixes to the mounting debt problem. The central and local governments simply do not have enough resources to address the issue all at once, leaving the country’s economic recovery and long-term growth prospects under threat.