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China’s fiscal stimulus is losing its effectiveness, S&P says

Pictured is a commercial residential property under construction on March 20, 2024 in Nanning, capital of south China’s Guangxi Zhuang Autonomous Region.

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BEIJING — China’s fiscal stimulus measures are losing effectiveness and are more of a strategy to buy time for industrial and consumer policies, Yunbang Xu, senior analyst at S&P Global Ratings, said in a report Thursday.

The analysis used government spending growth to measure fiscal stimulus.

“From our perspective, fiscal stimulus is a long-term purchasing strategy that could have long-term benefits, whether projects are focused on boosting consumption or on industrial upgrades that increase value added,” Xu said.

China has set a target of around 5% GDP growth this year, a target many analysts consider ambitious given the level of stimulus announced. The head of the top economic planning agency said in March that China would “strengthen its macroeconomic policies” and increase coordination among fiscal, monetary, employment, industrial and regional policies.

High debt levels limit the extent of fiscal stimulus a local government can undertake, whether the city is considered a high- or low-income region, the S&P report said.

Public debt as a percentage of GDP can vary from around 20% for the high-income city of Shenzhen to 140% for the much smaller, low-income city of Bazhong in southwestern Sichuan province, it says. The report.

“Given budgetary constraints and declining efficiency, we hope that local governments will focus on reducing red tape and take other measures to improve the business environment and support growth and living standards long term,” S&P’s Xu said.

“Investments are less effective amid a drastic slowdown in the real estate sector,” Xu added.

Investment in fixed assets for the year so far accelerated in March compared to the first two months of the year, thanks to an acceleration in investment in the manufacturing sector, according to official data released this week. Investment in infrastructure slowed its growth, while investment in real estate declined further.

The Chinese government announced plans earlier this year to support domestic demand with subsidies and other incentives for equipment upgrades and trade in consumer products. These measures are officially expected to generate more than 5 trillion yuan ($704.23 billion) in annual equipment spending.

Officials told reporters last week that fiscally, the central government would provide “strong support” for such improvements.

S&P found that local government fiscal stimulus has generally been larger and more effective in wealthier cities, based on data from 2020 to 2022.

“Higher-income cities have a head start because they are less vulnerable to declining real estate markets, have stronger industrial bases, and their consumption is more resilient to downturns,” Xu said in the report. “Industry, consumption and investment will remain the main drivers of growth in the future.”

“High-tech sectors will continue to drive China’s industrial upgrading and anchor long-term economic growth,” Xu said. “That said, overcapacity in some sectors could cause price pressures in the short term.”


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