After weeks of anticipation, China’s government finally announced details of its fiscal plans. The government said it would issue about $1.4 trillion of additional government bonds over three years to repay local governments’ off-balance-sheet debts. This is in line with figures announced in October but fell short of hopes. Officials said other initiatives, such as a major recapitalisation of the largest state-owned commercial banks, remain in the works. China’s pivot to stimulus is unfolding as a series of measures rolled out over several months, rather than a single make-or-break event.
The latest stimulus package is their biggest fiscal package in recent years, and the latest effort to jump-start economic growth as the Chinese government battles trade tensions and the threat of sweeping new tariffs from Donald Trump.
Source: Goldman Sachs
The stimulus plan is designed to restructure local governments’ “hidden” debt, much of which is held in off-balance sheet finance vehicles that regional administrations use to fund infrastructure projects. Local governments are one of the engines of China’s economy and are crucial providers of capital investment for regional growth, thanks to the central government’s reluctance to take on debt. But the plan stopped short of supporting household spending and tackling a property sector slowdown, as investors had hoped.
Many experts are questioning whether Beijing’s efforts will be enough to give a decisive boost to the world’s second-largest economy, especially if Chinese exports face higher tariffs after Trump takes office next year, and whether the latest package will even resolve local governments’ debt. Exports have surged ahead of any changes in tariffs to be announced.
Chinese credit growth slows to historic lows amid muted household and business loan demand
Source: Pantheon Economics
Why did Beijing not offer more direct stimulus?
Beijing argues that by restoring the health of local governments, it is laying the foundations for future healthy growth. But analysts say the latest plan does not amount to stimulus, because it adds little new spending to the economy. Investors had hoped policymakers would sweeten the debt resolution plan by buying up some of China’s millions of unsold homes or directly supporting households. The consensus is that the lack of pro-growth measures, especially consumer stimulus, was a disappointment.
A key debate within China is how to boost consumption. Officials said a one-off cash handout would be saved rather than spent, but more permanent support for households, such as increasing monthly pensions for the rural population, would raise consumption.
Officials recognise that stimulus needs to be accompanied by structural change. Debt swaps to support local government spending are ok, but unless the problem of limited revenue for local governments (compared to their spending requirements) is sorted out, then the debt will simply build up again.
Perhaps Beijing is reserving its fiscal “dry powder” for when Trump’s tariff plans become clearer. It is hard to lay out any measures to buffer the economy before you know where the tariffs will hit. So expansionary policies will need to be on a wait-and-see basis.
China was not likely to try and get ahead of potential tariffs that may be imposed. Instead, the government was likely to try to use some of the lessons from the first Trump administration and try to avoid the type of continued escalation seen in 2018.
Chinese pushing exports ahead of potential tariff war
Source: Goldman Sachs
The fact that China appears to be preparing for a trade war and is keeping some of its stimulatory plans in the bottom draw ahead of that battle, is a worry for Australia. UBS estimates that US tariffs on China could slice 1.5% to 1.75% off GDP growth. Stimulus could offset this, but the hit to the Chinese economy – and the demand for key Australian exports such as iron ore and coal – may be significant.
Treasurer Jim Chalmers said, “We wouldn’t be immune from escalating trade tensions that might ensue.”
On CBA’s numbers, housing in China still accounts for 30% of steel industry demand. Even before Trump’s victory, China probably needed 3 or 4 years to get on top of this structural challenge. But fixing it in the middle of the trade war will be more difficult. Prices of iron ore and copper, materials used in construction, declined on the expectation of lower demand in China, where the property market crisis has been dragging on growth for years.
It is no surprise that commodity prices, and resource stocks, have been under pressure.
