China Gears Up for Massive $1.4 Trillion Stimulus Package

Upcoming Stimulus Decisions:

• China’s top legislative body, the Standing Committee of the National People’s Congress (NPC), is set to approve a new fiscal package worth over 10 trillion yuan ($1.4 trillion) in the coming week.
• The package includes:
• 6 trillion yuan in special sovereign bonds to be raised over three years, including 2024.
• Additional local government bond issuances on top of their regular quotas.
• The timing of the meeting, which coincides with the U.S. presidential election, allows China to potentially adjust the stimulus based on the election outcome.

Goals and Priorities of the Stimulus:

• The primary goal is to address the growing risks associated with local government hidden debt.
• The package also aims to support financial system stability and domestic demand in the face of an economic slowdown.
• Authorities are considering other stimulus initiatives worth at least 1 trillion yuan, such as measures to boost consumption, including trade-in and renewal of consumer goods.
• An additional 1 trillion yuan could be raised via special treasury bonds for capital injection into large state banks.

Economic Context and Rationale for the Stimulus:

• China’s economy has been hit hard by a prolonged property sector crisis and the ballooning debt of local governments.
• The planned fiscal spending, which equates to over 8% of China’s GDP, suggests a shift to a higher stimulus gear to prop up the economy.
• However, the stimulus package is still not as large as the 4 trillion yuan package deployed in 2008 during the global financial crisis, which accounted for 13% of China’s GDP at the time.

Potential Impact of the Stimulus:

• Experts believe the significant fiscal stimulus should boost confidence and support economic growth in China.
• However, support for consumption remains modest, so it is unlikely that the stimulus will lead to a substantial improvement in the economic growth outlook or vanquish deflation risks.

Considerations Regarding the U.S. Election:

• The timing of the NPC Standing Committee meeting, which coincides with the week of the U.S. presidential vote on Nov. 5, allows Beijing to adjust the fiscal package based on the election outcome.
• If former President Trump wins a second term, Beijing may announce a stronger fiscal package, as his return to the White House is expected to intensify the economic headwinds for China.

Challenges and Limitations of the Stimulus:

• The plans are not finalized yet and remain subject to changes, indicating the fluid nature of the policymaking process.
• The scale of the stimulus, while substantial, is still not at the level of the 2008 response, suggesting that Beijing is being cautious in its approach.
• The focus on addressing local government debt risks and financial system stability could mean that the support for domestic demand may be relatively modest.

In conclusion, China’s consideration of a massive $1.4 trillion stimulus package reflects the urgency to shore up its fragile economy amid multiple challenges. The timing of the policy decisions, which coincides with the U.S. presidential election, adds an additional layer of complexity to the policymaking process. While the stimulus is expected to boost confidence and growth, the ultimate impact on the economy remains to be seen.