China unveils fiscal stimulus measures to boost growth

On Saturday, October 12, 2024, China’s finance ministry announced a fiscal stimulus package aimed at reviving the economy and reaching the government's growth target, although they did not reveal the size of these new measures.

This long-awaited announcement regarding increasing the counter-cyclical adjustment of fiscal policy and promoting high-quality economic development comes after the central bank and other regulators introduced the most aggressive monetary stimulus since COVID-19 in late September, which included steps to help the struggling property market, such as cutting mortgage rates.

The key terms of this press conference were “increasing the intensity” of fiscal policy and “counter-cyclical adjustment.” Counter-cyclical adjustment refers to government measures that aim to smooth out the volatility of the economic cycle based on its various phases, thereby better facilitating economic development.

In the fiscal policy toolbox, tools such as ultra-long special government bonds, special local government bonds, fiscal subsidies, interest discounts, and tax policies are commonly used, and a multi-faceted approach is essential for optimal results.

Finance Minister Lan Foan pointed out during the press conference that the central government has “relatively large room” to enhance its borrowing and deficit capabilities. The Ministry of Finance plans to roll out a series of targeted incremental policy measures aimed at stabilizing growth, expanding domestic demand, and mitigating risks. Currently, there are four main areas of arrangement:

● Increase the debt limit significantly to support local governments in resolving hidden debts.

●Issue special government bonds to support state-owned large commercial banks in replenishing core tier-1 capital.

● Utilize local government special bonds, special funds, tax policies, and other measures to support the stabilization of the real estate market.

● Enhance support for key groups.

1. A proposed one-time increase in the debt limit to replace local governments’ existing hidden debts. This represents the most substantial measure in recent years to support debt resolution, significantly alleviating pressure on local governments and allowing them to allocate more resources to support economic development.

2. The issuance of special government bonds to support state-owned large banks in replenishing core tier-1 capital. This is beneficial for the six major state-owned banks, providing them with more funds to support the real economy and stabilize the financial system.

3. Allowing special bonds to be used for the acquisition of existing housing or unused land, thereby supporting the real estate market in stabilizing. This is akin to a reverse operation of “land selling,” which can provide liquidity to the real estate industry, helping companies overcome difficulties. It is similar to share buybacks by listed companies, which can help invigorate the secondary market and stabilize housing prices.

4. Various policy tools are still under study, and the central government has “relatively large room” for increasing debt and deficits. Although the Ministry of Finance leaders did not explicitly disclose the scale of fiscal stimulus, they left ample room for speculation, indicating that the leverage of fiscal policy can continue to expand. Some analysts contend that while substantial actions like issuing additional government bonds and raising fiscal deficits may encounter “legal procedural” challenges, further fiscal stimulus is anticipated. This could help stabilize market expectations and prevent drastic fluctuations.

According to a Bloomberg survey, most market participants expect China to increase its fiscal stimulus by 2 trillion yuan before 2025.

Although the Ministry of Finance has not directly provided specific figures for the stimulus scale, it has conveyed positive policy signals and introduced several concrete incremental policies. These developments are beneficial for resolving local debts and supporting the real estate market.

In summary, China’s macro monetary and fiscal policies have undergone a significant turnaround, clearly demonstrating the commitment of relevant departments to bolster the capital market. At the same time, officials are also aiming to prevent a speculative bull market in the capital market, potentially guiding a healthier market development by gradually releasing positive policies in the future.