China’s Fiscal Stimulus Plan

(Reuters) – China plans to issue special sovereign bonds worth about 2 trillion yuan ($284.43 billion) this year as part of a fresh fiscal stimulus, said two sources with knowledge of the matter. This move aims to address strong deflationary pressures and faltering economic growth.

As part of the package, the Ministry of Finance (MOF) plans to issue 1 trillion yuan of special sovereign debt primarily to stimulate consumption amid growing concerns about a stuttering post-COVID economic recovery.

Part of the MOF proceeds raised via special bonds, which are floated for a specific purpose, will be used to increase subsidies for the trade-in and renewal of consumer goods and for the upgrade of large-scale business equipment.

The proceeds will also be used to provide a monthly allowance of about 800 yuan, or $114, per child to all households with two or more children, excluding the first child.

China also aims to raise another 1 trillion yuan via a separate special sovereign debt issuance and plans to use the proceeds to help local governments tackle their debt problems.

Most of China’s fiscal stimulus still goes into investment, but returns are dwindling and the spending has saddled local governments with $13 trillion in debt. China’s household spending is less than 40% of GDP, about 20 percentage points below the global average.

Some of the fiscal support measures could be unveiled as soon as this week, said the sources, who declined to be named as they were not authorised to speak to the media.

China’s State Council Information Office and the MOF did not immediately respond to requests for comment.

Growth Target in Focus

Chinese leaders pledged on Thursday to push to hit the 2024 economic growth target of roughly 5% and stop declines in the housing market, state media reported.

The Politburo stated that the country would make good use of its ultra-long special sovereign bonds and local government special bonds to support government investment, ensuring necessary fiscal spending is guaranteed.

This planned fiscal expansion is the latest attempt by Chinese policymakers to revive an economy grappling with deflationary pressures and the risk of missing this year’s growth target due to a sharp property downturn and fragile consumer confidence.

It follows the central bank’s announcement on Tuesday of broader-than-expected monetary stimulus and property market support measures, including liquidity injections and lower borrowing costs, aiming to restore economic confidence.

These measures have lifted market sentiment, primarily due to raised expectations of a forthcoming fiscal package to complement the monetary and financial measures already presented.

Under guidance from top leadership, the MOF, alongside several government bodies, has been formulating fiscal stimulus measures aimed at economic revival in recent weeks.

In addition to the special sovereign debt issuance targeting consumption, Chinese authorities also plan to enhance financial support for small and medium-sized enterprises, including employment subsidies and tax relief, to reduce their operating costs.

Morgan Stanley economists, led by Robin Xing, expressed their expectations for more fiscal support for housing and social welfare spending in the coming months. They noted that this reflects Beijing’s seriousness about tackling deflation and exploring all available options.

Furthermore, Bloomberg News reported on Thursday that China is considering injecting up to 1 trillion yuan of capital into its biggest state banks to bolster their capacity to support the struggling economy, primarily by issuing new special sovereign bonds.