China has moved to step up its economic support, pledging more aid to its struggling real estate sector and debt-laden local governments. But officials have yet to convince economists that they are doing enough to overcome deflation.
In a much-anticipated press conference on Saturday, Finance Minister Lan Huo-an refrained from putting a price tag on China’s fiscal stimulus as investors had expected, saying more details would be available when China’s Legislative Council meets in the coming weeks. He suggested that it would be announced. But the support measures he announced give little indication that Chinese authorities feel any urgency to boost consumption, which many economists believe will energize the economy and put it on a more positive growth path. viewed as essential.
“Policies to support consumption look quite weak,” said Jacqueline Long, chief China economist at BNP Paribas SA. “It is still too early to judge whether a significant turnaround in deflationary pressures or a bottoming out in the real estate market, two key issues facing the Chinese economy, is imminent.”
Sunday’s data likely showed consumer prices fell below 1% in September for the 19th straight month, amid deepening factory price deflation and easing demand before the recent stimulus package was a huge success. It will make it stand out. Officials said little about deflation during an hour-long briefing Saturday.
Ahead of the weekend, investors and analysts expected China to roll out a new fiscal stimulus package worth 2 trillion yuan ($283 billion), including potential subsidies, consumption vouchers and financial support for child-rearing families. I was doing it. That could still happen within weeks. Last year, China’s legislative body, the Standing Committee of the National People’s Congress, used its late October meeting to announce budget revisions and additional government debt.
However, Lan’s comments on Saturday showed that China is satisfied with the overall direction of the economy. He vowed to allow local governments to use special bonds to buy unsold homes and promised the biggest effort in recent years to ease local governments’ debt burdens, but all of this is short-term. It is highly unlikely that this will lead to growth promotion.
“My sense is that unless the size of the final fiscal stimulus is significantly larger than expected, it will take a little too long for fiscal policy moves to unfold to reach 5% this year.” Ta. ING Bank NV’s Greater China talks about China’s economic growth targets for 2024.
Mr. Lunn also suggested there is scope for more debt issuance and government spending, measures that could be announced when lawmakers meet later this month or in early November.
Allowing local governments to exchange debt for cheaper loans would free up funds for public services and encourage authorities to increase spending. Using special bonds to buy unsold apartments and convert them into public housing could help stabilize falling property prices and give homeowners greater peace of mind.
The Ministry of Finance did not provide exact values for either indicator. But Société Générale SA said these are among the measures that have led economists to think “this time may be different” after previous stimulus efforts failed.
“Prospects for a sustained recovery and reflation remain strong as housing stability increases and pressure from local government deleveraging eases,” the bank’s economists Wei Yao and Michelle Lam said in a note. It’s improving,” he said.
As far as direct relief is concerned, Lan said on Saturday that China will provide twice as many scholarships and enhance financial aid to students. This comes after youth unemployment rose to its highest level this year in August. He also vowed to continue support for groups in need, citing last month’s one-off payments to the poor as an example.
The large-scale lack of benefits is not surprising, as the Chinese government has long disdained what it calls “welfarism.”
Bruce Pang, chief economist for Greater China at Jones Lang LaSalle, said: “No free food for the lazy is policymakers’ basic explanation for why large-scale subsidies across the country are unlikely.” “It’s a very strong idea,” said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle. The country’s top economic planning agency.
Economists have long advocated for a shift in fiscal policy priorities to focus more on domestic consumption. This move towards a more balanced and sustainable growth model will reduce reliance on exports to support the economy, even as trade tensions increase.
The old strategy of making debt-fueled investments in public works projects from roads to bridges has become less effective as decades of urbanization saturated the nation’s infrastructure. Due to a lack of quality projects, authorities have more funds at their disposal than projects to spend.
The Ministry of Finance announced that the government will expand the areas eligible for financing support through the issuance of special local bonds. This could inject up to 1 trillion yuan, currently sitting idle, into the economy, said Ding Xuan, chief economist for Greater China and North Asia at Standard Chartered.
The financial difficulties of local governments are closely related to the slump in real estate. Land sales, the main driver of revenue, have declined as taxes and other sources of revenue have declined due to the broader economic slowdown. After borrowing too much to support growth after the 2008 financial crisis, and then dealing with a costly pandemic, many local governments are now struggling to meet their daily spending needs, such as paying salaries to civil servants. I’m having a hard time fulfilling it.
Some jurisdictions are choosing to delay payments to contractors, impose steep fines, or impose decades-old taxes on businesses. The move is a further blow to already fragile trust in the private sector, and the Chinese government has warned local authorities against imposing excessive penalties.
The Chinese government has also given credit to companies that have aggressively borrowed on behalf of local governments in the past few years to support infrastructure financing by allowing local governments to exchange more “hidden debt.” Trying to limit risk. But bonds spent on debt exchanges do not generate new growth in the economy, even if they help maintain financial and social stability.
Julian Evans-Pritchard, head of China economics at Capital Economics, said efforts to address local government debt risks “mainly involve moving debt from one sector of the state to another.” He said that the impact on short-term demand would be limited. Citing the fiscal boost, he left his 2024 growth forecast unchanged at 4.8% and revised his forecast for next year upward from 4.3% to 4.5%.
Larry Hu, Macquarie Group’s head of China economics, said China’s two-speed growth model, which relies on manufacturing and exports to offset the property sector, was “becoming increasingly unsustainable”. Ta. He said authorities would have to change course if exports weaken or domestic demand deteriorates further, leading to social unrest.
“The intense tension at the September Politburo meeting suggests that this is a critical moment,” Hu wrote in a memo on Saturday. “But we need more evidence to confirm this.”
