BEIJING, Oct 12 (Reuters) – China pledged on Saturday to “significantly increase” debt to revive its sputtering economy, but left investors guessing on the overall size of the stimulus package, a vital detail to gauge the longevity of its recent stock market rally.
Finance Minister Lan Foan told a press conference Beijing will help local governments tackle their debt problems, offer subsidies to people with low incomes, support the property market and replenish state banks’ capital, among other measures.
But Lan’s omission of a dollar figure for the package is likely to prolong investors’ nervous wait for a clearer policy roadmap until the next meeting of China’s rubber-stamp legislature, which approves extra debt issuance. A date for the meeting has yet to be announced but it is expected in coming weeks.
The press conference “was strong on determination but lacking in numerical details,” said Vasu Menon, managing director for investment strategy at OCBC in Singapore.
“The big bang fiscal stimulus that investors were hoping for to keep the stock market rally going did not come through,” said Menon, adding this may “disappoint some” in the market.
A wide range of economic data in recent months has missed forecasts, raising concerns among economists and investors that the government’s roughly 5% 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.
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.
STIMULUS STEP-UP
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% of economic output. But the fund calculates overall public debt, including that of local governments, at about $16 trillion, or 116% of GDP.
“There is still relatively big room for China to issue debt and increase the fiscal deficit,” said Lan.
He added local governments still have a combined 2.3 trillion yuan to spend in the last three months of this year, including debt quotas and unused funds. Municipalities will be allowed to repurchase unused land from property developers, he said.
Low wages, high youth unemployment and a feeble social safety net mean China’s household spending is less than 40% of annual economic output, some 20 percentage points below the global average. Investment, by comparison, is 20 points above.
Lan said more reforms will be announced “step-by-step.”
“The focus seems to be around funding the fiscal gap and solving local government debt risks,” Huang Xuefeng, credit research director at Shanghai Anfang Private Fund Co, said of the press briefing.
“Without arrangements targeting demand and investment, it’s hard to ease deflationary pressure.”
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Reporting by Joe Cash, Kevin Yao, Ellen Zhang and Ankur Banerjee; Writing by Eduardo Baptista and Marius Zaharia; Editing by Kim Coghill
Our Standards: The Thomson Reuters Trust Principles.
