Investors are eagerly awaiting new policies from Beijing this weekend, hoping they will help revive the country’s economy.
China’s Finance Minister Lan Fo’an is scheduled to hold a press conference at 10 a.m. local time on Saturday to introduce measures to “strengthen countercyclical fiscal policy adjustments and promote high-quality economic development”, according to the State Council Information Office.
Earlier this week, the National Development and Reform Commission (NDRC) offered little clarity on a fresh package which investors were expecting it to announce, and the disappointment led to a disruption in the China stock market rally.
As Beijing faces the possibility of missing its annual growth target of 5%, some analysts are confident that significant fiscal measures will be unveiled at the much-anticipated event, while others remain cautious.
Multi-trillion yuan package under consideration
According to Bloomberg, China’s government is expected to announce a substantial fiscal stimulus package, potentially reaching 2 trillion yuan ($283 billion), as it seeks to revive its flagging economy and bolster investor confidence.
A survey conducted by Bloomberg revealed that the majority of 23 market participants expect the stimulus to come in the form of government bonds, with hopes that the package will shift focus from real estate investment to consumer spending and other areas of need.
Reuters also reported that China may issue special sovereign bonds worth 2 trillion yuan this year, with half of the funds directed at reviving domestic consumption and the remainder aimed at alleviating local government debt.
However, some analysts, like Morgan Stanley’s chief Asia economist, Chetan Ahya, believe a package as large as 10 trillion yuan ($1.4 trillion) may be necessary to fully revitalize the economy.
Speaking to CNBC’s “Street Signs Asia”, Ahya noted that the package will likely focus on stimulating domestic demand, recapitalizing banks, and restructuring local government debt.
They need something like that to get the economy out of deflation and ultimately create a sustained turnaround in investors’ confidence.
Economists have also emphasized the importance of directing the stimulus toward households rather than continuing to rely on debt-driven growth through the real estate sector. Pushan Dutt, a professor of economics at INSEAD, said in a Bloomberg report,
The stimulus should be multi-year and targeted to households and not restarting the real estate investment-led growth story. It is the focus of the stimulus rather than the size that is important.
This pivot away from real estate investment reflects the government’s intent to stabilize the economy through measures that encourage domestic consumption and long-term growth, rather than short-term boosts through infrastructure and property development.
Real estate, once a major driver of China’s rapid growth, now poses significant risks to financial stability due to accumulated debt.
Package could also include subsidies, incentives
In addition to bond issuances, the stimulus package is expected to include targeted subsidies and consumer incentives to boost household spending.
These could take the form of consumption vouchers, subsidies for the elderly and low-income families, and support for families with children.
Measures to stimulate the purchase of consumer goods, such as vehicles, could also be part of the plan.
Morgan Stanley’s economists believe that a larger-than-expected package or clear forward guidance on future fiscal policy could provide a significant boost to market sentiment.
“Higher size with clear consumption stimulus portion, or clear forward guidance for next year’s expansionary policy, would constitute a positive surprise.”
Risks of too much stimulus
Despite widespread support for a major stimulus package, some analysts caution that an overly aggressive approach could signal deeper economic troubles.
Chetan Ahya warned that Beijing may be cautious about unveiling too large a stimulus package at once, as it could give the impression that the economy is in worse shape than it appears.
“They could phase the measures out into piecemeal announcements,” he said.
Moreover, an enormous stimulus could exacerbate China’s already high debt levels, particularly at the local government level.
Local governments, which have relied heavily on land sales for revenue, have faced growing fiscal strains as property markets weakened.
The central government may need to step in to help restructure local debts and provide transfer payments to ensure that basic services and salaries are covered.
Property market still a concern
While the property market has been a significant driver of China’s economy for decades, it now poses a considerable challenge.
Beijing has already taken steps to prop up the sector, cutting interest rates and introducing support for both property and stock markets in late September.
However, economists argue that these measures are insufficient to lift overall demand. Tianlei Huang, senior researcher at the Pearson Institute for International Economics said earlier,
After the huge property market bust, Chinese households stopped viewing housing as a preferred asset class. That perception will be extremely hard to reverse.
Chen Zhao, chief global strategist at Alpine Macro, told CNBC’s “Squawk Box Asia” that the property sector remains a drag on the broader economy, with substantial inventories of unsold homes and declining property prices.
He believes that any effective stimulus package needs to address this overhang, particularly by clearing large inventories of unsold properties.
“A two trillion yuan bond issuance is unlikely to turn the economy around,” Zhao said, adding that a more significant stimulus package of 4-5% of GDP would be necessary to reverse the economic downturn.
Investors eye forward guidance
The upcoming weekend press conference will not only reveal the scope of China’s fiscal efforts but also provide crucial forward guidance on the government’s long-term economic strategy.
Economists at Morgan Stanley predict that the Ministry of Finance will hint at expansionary policies for 2025, which could see another 2-3 trillion yuan added to the fiscal deficit.
However, any additional stimulus will likely require approval from the National People’s Congress or its standing committee, which could delay announcements on larger bond issuances until later in the year.
Ultimately, China faces a delicate balancing act between boosting short-term growth and managing long-term financial risks.
While investors hope that the government’s actions will provide enough stimulus to stabilize the economy, the pressure to avoid inflating an already high debt burden looms large.
For now, all eyes are on Beijing’s upcoming announcement, which could either reinforce or shake market confidence in China’s economic future.
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