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China’s lawmakers will begin a week-long session on Monday that is expected to approve the country’s largest fiscal package since the pandemic to boost confidence in the world’s second-largest economy.
Beijing has yet to indicate the scale of the measures but finance minister Lan Fo’an last month promised it would help resolve some of the trillions of dollars of debt weighing down China’s cash-strapped local governments.
Analysts believe China needs to spend up to Rmb10tn ($1.4tn) over three years to help reflate an economy that has been hit by a prolonged property slump.
But they warn that China will need to target fiscal spending not just at local government debt but also at households, which have suffered from the real estate crisis, if it is to rekindle confidence in the economy.
Fiscal easing “holds the key for the effectiveness of the ongoing stimulus package”, Goldman Sachs analysts said in a report, highlighting the importance of this week’s NPC meeting.
China’s stimulus drive started abruptly in late September when the central bank and other financial regulators announced interest rate cuts and other monetary measures to prop up the stock and real estate markets.
Economists believe China’s leaders became concerned after GDP in the three months to the end of September grew at a rate below the official annual target of 5 per cent for the second quarter in a row.
China is grappling with what some call a two-speed economy, with strong exports offsetting weak domestic demand.
But market excitement over Beijing’s initial change of heart on the stimulus has been tempered by the slow release of details of the next phase of the campaign: the fiscal spending package.
NPC Observer, a website tracking China’s parliament, said the NPC would probably announce its decision on the fiscal package on state television evening news on Friday, with the details to come later that day.
China’s deputy minister of finance Liao Min said in Washington late last month that the package would involve “a series of powerful measures” to resolve debt problems at local governments, which were heavily reliant on land sales until the country’s property bubble burst in 2021.
He said the policies would also aim to stabilise the real estate market and spur domestic demand with schemes to encourage industry to upgrade its equipment and consumers to replace home appliances and other goods.
“China is confident that it will achieve the annual economic growth target . . . and continue to inject momentum into global economic growth,” Liao said, according to the finance ministry website.
Analysts believe the NPC could raise the debt ceiling to allow the issuance of up to Rmb6tn of swaps for local governments to refinance off-balance sheet debt.
Economists said the NPC could also approve an additional Rmb1tn in special sovereign bonds to recapitalise the large state banks.
Goldman said the government might raise the official central government fiscal deficit target to 3.6 per cent of GDP next year from 3 per cent this year. It said the fiscal package would be smaller than during Covid and earlier years.
Most analysts cautioned that while tackling local government debt was good for financial stability and might spur some consumption if it led to the payment of civil servant salaries and arrears to suppliers, it would not add much to demand. Nor would the recapitalisation of banks.
“Any additional borrowing approved for these policies won’t provide much of a fiscal boost,” said Leah Fahy, China economist at Capital Economics.
Macquarie economist Larry Hu also warned that the aim of the stimulus was mainly to meet official growth targets.
“The stimulus measures announced so far are sufficient to achieve 5 per cent GDP growth this year, but not enough to reflate the economy. Consumer and homebuyer confidence remains low,” Hu said.
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