China says it will 'significantly increase' debt to revive economic growth

BEIJING - China said on Saturday (Sept 12) it will "significantly increase" government debt issuance to offer subsidies to people with low incomes, support the property market and replenish state banks' capital as it pushes to revive sputtering economic growth.

Without providing the size of the fiscal stimulus being prepared, the key detail global investors have been waiting for to gauge the sustainability of a recent surge in Chinese stocks, Finance Minister Lan Foan told a press conference there will be more "counter-cyclical measures."

"There is still relatively big room for China to issue debt and increase the fiscal deficit," said Lan.

The world's second-largest economy faces strong deflationary pressures due to a sharp property market downturn and frail consumer confidence, which have exposed its over-reliance on exports in an increasingly tense global trade environment.

A wide range of economic data in recent months has missed forecasts, raising concerns among economists and investors that the government's roughly 5 per cent growth target this year was at risk and that a longer-term structural slowdown could be in play.

Data for September, which will be released over the coming week, is expected to show further weakness, but officials have expressed "full confidence" that the 2024 target will be met.

Fiscal stimulus measures in China have been the subject of intense speculation in global financial markets after a September meeting of the Communist Party's top leaders, the Politburo, signalled an increased sense of urgency about mounting economic headwinds.

Chinese stocks reached two-year highs, spiking 25 per cent within days since that meeting, before retreating as nerves set in given the absence of further details on the government's additional spending plans.

"Investors were hoping for fresh stimulus, accompanied by specific numbers," from the press conference, said Rong Ren Goh, portfolio manager at Eastspring Investments in Singapore.

"There were meaningful measures announced," he said. "However, with markets focused on 'how much' over 'what', they were invariably set up to be disappointed by this briefing."

Reuters reported last month that China plans to issue special sovereign bonds worth about 2 trillion yuan ($284.43 billion) this year as part of fresh fiscal stimulus.

Half of that would be used to help local governments tackle their debt problems, while the other half will subsidise purchases of home appliances and other goods as well as finance a monthly allowance of about 800 yuan, or $114, per child to all households with two or more children.

Separately, Bloomberg News reported that China is also considering injecting up to one trillion yuan of capital into its biggest state banks, though analysts say that might do little to revive stubbornly weak credit demand.

Additional debt issuance in China is typically subject to approval by its rubber-stamp parliament, which is expected to meet in coming weeks.

Stimulus step up

The central bank in late September announced the most aggressive monetary support measures since the Covid-19 pandemic, including interest rate cuts, a one trillion yuan liquidity injection and other steps to support the property and stock markets.

While the measures have lifted market sentiment, analysts say Beijing also needs to firmly address more deeply-rooted structural issues such as boosting consumption and reducing its reliance on debt-fuelled infrastructure investment.

Most of China's fiscal stimulus still goes into investment, but this leads to debt outpacing economic growth as returns are dwindling.

The International Monetary Fund estimates central government debt at 24 per cent of economic output. But the fund calculates overall public debt, including that of local governments, at about $16 trillion, or 116 per cent of GDP.

Lan said Beijing will support local governments to resolve their debt issues, adding that they still have a combined 2.3 trillion yuan to spend in the last three months of this year, including debt quotas and unused funds.

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Local governments will be allowed to repurchase unused land from property developers, Lan said.

Low wages, high youth unemployment and a feeble social safety net mean China's household spending is less than 40 per cent of annual economic output, some 20 percentage points below the global average. Investment, by comparison, is 20 points above.

"If this package can be deployed soon, the growth target this year can be achieved," Bruce Pang, chief China economist at Jones Lang Lasalle, said of the finance ministry's announcement.

"But more challenges are ahead next year and the market consensus for 2025 growth is around 4.5 per cent," he said, adding he expects a slowdown in the longer term.