China - Why an Unpopular Policy Measure Might Work
China's top legislative body is set to approve a substantial fiscal package next week, as Beijing moves to address its economic challenges. According to sources familiar with the matter, the NPC is considering approving the issuance of over CNY10tn (approximately USD1.4tn) in extra debt over the next few years.
The comprehensive package is expected to include CNY6tn in special sovereign bonds primarily aimed at addressing local government debt risks, and up to CNY4tn in special-purpose bonds for land and property purchases over the next five years. This measure aims to enhance local governments' ability to manage land supply and alleviate liquidity and debt pressures on both local governments and property developers.
The timing of the NPC's meeting, which is scheduled for November 4-8 and coincides with the US presidential election, suggests that Beijing is keeping a close eye on the election outcome. The sources indicate that China may announce a stronger fiscal package if Donald Trump, who has vowed to impose 60% duties on imports from China, wins a second term.
While the proposed fiscal stimulus is significant, it falls short of package deployed in 2008 during the global financial crisis, which accounted for 13% of China's GDP at the time. The current stimulus package is expected to amount to around 8% of the world's second-largest economy’s output.
Analysts have noted that the policy priorities appear to focus first on addressing local government hidden debt, followed by financial system stability and then supporting domestic demand. In that order. We have sympathy with those who have expressed concerns that the stimulus measures may not be sufficient to substantially improve the economic growth outlook or address the ongoing deflationary conditions. What are really needed are concrete measures to stimulate domestic consumption via trade ins payments and other such incentives.
Or cut deposit rates to zero. While the latter would be a radical and very unpopular move, that fact is that Chinese household savings are absolutely massive and doing nothing to help the situation. Quite the opposite. This is effectively what happened in most major economies during both the GFC crisis and Covid era. This would also underpin the banking system’s profitability which would be no bad thing at all.
The proposed fiscal package reflects the urgency in Beijing to shore up the economy and mitigate the impact of the ongoing property sector crisis and local government debt issues. As China navigates these challenges, the outcome of the US presidential election could have significant implications for the country's economic policies and the size of the stimulus measures.
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