Local media reported on Tuesday that China may raise an additional 6 trillion yuan ($850 billion) from special treasury bonds over three years to stimulate a sagging economy. The Caixin Global report, which cited sources with knowledge of the matter, came after Finance Minister Lan Foan said Beijing would “significantly increase” debt on Saturday. However, traders responded with little enthusiasm, given that no details were provided on the size and timing of the fiscal measures expected to spur Growth in China, which has yet to reach its economic growth target this year.
Despite China’s recent monetary stimulus and property sector support measures, a sluggish economy has weighed on shares this year. The Shanghai Composite and the blue-chip CSI 300 index lost more than 5% in 2018, while foreign markets also struggled. The bleak outlook has raised the risk that authorities will fail to meet their growth target this year and face renewed deflationary pressures.
The upcoming government stimulus is expected to provide subsidies for low-income households, support indebted local governments and the property market, and replenish state banks’ capital. The easing measures will also aim to boost investment, which accounts for only 24% of GDP, and help reduce the imbalance between household spending and investment. Analysts say the country’s weak consumer spending stems from low wages, high youth unemployment, and a feeble social safety net.
Chinese policymakers also consider allowing local governments to borrow money to buy unused land for development as the property sector suffers from a prolonged slump. The move is meant to ease a strain on local government finances, which have been hurt by a drop in revenue from land sales. According to the IMF, local governments have accumulated over 60 trillion yuan of debt.
Investors are also watching for further signs that the central bank may cut benchmark interest rates next week to support Growth. A rate cut has boosted stocks in the past by encouraging investors to seek higher returns.
The upcoming government stimulus is expected to be the largest in recent years as Beijing struggles to overcome a slowdown in its economy. It comes amid a global sluggishness that has hurt trade and manufacturing. The world’s total public debt is on track to exceed $100 trillion this year for the first time, a new IMF forecast showed and is set to approach 100% of global gross domestic product by 2030. The world’s poorest countries are more in debt than ever since 2006 and are more likely to default than rich nations. There is recurrent bipartisan support in Congress for addressing this issue. Still, successive administrations have decided to kick the can down the road and hope that China will eventually liberalize and embrace Western norms and values.
