China is reportedly considering the issuance of 6 trillion yuan (approximately $850 billion) in special treasury bonds over the next three years to bolster its struggling economy. Despite the substantial figure, this proposed fiscal stimulus has failed to uplift investor confidence, as reflected in the lukewarm performance of the stock market.
Unveiling the Stimulus Plan
According to a Caixin Global report, which cited sources familiar with the matter, this potential bond issuance follows statements from Finance Minister Lan Foan. On Saturday, he announced that China would “significantly increase” its debt to support economic growth. However, the lack of specific details surrounding the size and timing of these fiscal measures has left some investors dissatisfied.
The announcement arrives amid widespread speculation regarding the scope of Beijing’s economic rescue package. Earlier this month, Chinese stocks reached two-year highs following initial rumors of stimulus efforts. Yet, without confirmation of the details, markets retreated, leaving many investors cautious. By Tuesday, stocks had dipped 0.3%, indicating muted optimism about the reported stimulus.
Analysts Weigh In
While the market reaction has been subdued, financial experts suggest that the proposed bond issuance could help stabilize China’s growth in the short term. Xing Zhaopeng, senior China strategist at ANZ, stated, “This is in line with our expectations. We still believe that a growth target of around 5% is feasible for next year, and this level of stimulus should be sufficient to support that goal.”
In fact, last month, Reuters reported that China was considering issuing special sovereign bonds worth about 2 trillion yuan ($285 billion) this year alone as part of broader fiscal measures.
Economic Outlook: Growth Targets Under Pressure
Recent economic data from China has been less than encouraging. Both September’s trade and new lending figures fell short of expectations, raising concerns that the country might not hit its 2024 growth target of 5%. Analysts predict third-quarter growth will slow to 4.5%, compared to 4.7% in the second quarter, with hopes of a late-year rebound driven by the anticipated stimulus.
Authorities have already started implementing measures to support the economy. In late September, the Chinese government introduced monetary stimulus alongside support for the property sector. This was followed by a Politburo meeting in which leaders pledged “necessary spending” to bring the country’s growth trajectory back on track.
Challenges Ahead for China’s Economy
Despite the reported 6 trillion yuan bond issuance, hitting a consistent growth rate of 5% over the next few years will be a daunting task. Bruce Pang, chief China economist at Jones Lang LaSalle, noted that the additional funds could significantly improve China’s chances of achieving this growth rate in 2024 and 2025. However, challenges such as weakening external demand and the ongoing property crisis could hinder progress.
The property sector, which has been in sharp decline since 2021, remains a major concern for local governments. Many local governments relied on land sales to developers as a key revenue source. As the real estate market struggles, government revenues have shrunk, further straining the ability to invest in infrastructure and other growth-boosting projects.
The Role of Local Government Debt and Public Spending
The report also highlighted that the newly raised funds would be partially allocated to help local governments resolve their hidden debts. According to the International Monetary Fund (IMF), China’s central government debt is estimated at 24% of GDP, but overall public debt—including local government liabilities—stands at a staggering $16 trillion, or 116% of GDP.
With local governments heavily indebted and corporate balance sheets weakening, Xia Haojie, a bond analyst at Guosen Futures, expressed concern that investment will remain subdued unless the central government takes bold steps to increase leverage.
Global Impact and Trade Concerns
China’s economic woes extend beyond its borders. The nation’s reliance on debt-driven infrastructure investments and manufacturing has contributed to a significant imbalance between its role as a global producer and its lagging consumer demand. This imbalance has sparked trade tensions, particularly with the United States and Europe.
Furthermore, concerns about long-term growth potential are growing, even with the short-term stimulus. Lynn Song, ING’s greater China chief economist, emphasized that maintaining 5% growth in the coming years will be “a challenging task,” especially in the face of weaker global demand.
What’s Next?
The details of China’s fiscal stimulus are expected to be revealed in the coming weeks during a meeting of the Standing Committee of the National People’s Congress, the country’s top legislative body. Investors and analysts alike are eagerly awaiting more clarity on how Beijing plans to manage its debt and reignite economic growth.