China’s fiscal stimulus is facing challenges in its effectiveness, according to S&P Global Ratings senior analyst Yunbang Xu. The strategy is more of a tactic to lure time for implementing industrial and consumption policies rather than providing immediate relief. The analysis conducted by Xu used growth in government spending as a measuring tool for fiscal stimulus. It’s important to note that fiscal stimulus can have long-term benefits if projects are organized to revive consumption or focus on industrial advancements that add value.
China has set a target of approximately 5% GDP growth for this year, a goal that analysts have criticized capitalizing on the level of announced stimulus. In March, the head of the top economic planning agency in China emphasized the need to “strengthen macroeconomic policies” and enhance coordination among various sectors such as fiscal, monetary, employment, industry, and regions. However, high levels of debt are restricting local governments from implementing large-scale fiscal stimulus regardless of their income status.
According to the S&P report, the share of public debt as a percentage of GDP varies significantly among different regions in China. For instance, the high-income city of Shenzhen has a debt level of around 20%, while the low-income city of Bazhong in southwestern Sichuan province has a debt level of 140%. These high debt levels limit the capacity of local governments to implement effective fiscal stimulus measures. Therefore, local governments are expected to focus on reducing bureaucracy and other measures to enhance business environments and support long-term growth.
Xu highlighted that investment effectiveness has decreased drastically amid a slowdown in the property sector. Despite an increase in fixed asset investment in manufacturing in March, investment in infrastructure growth slowed down, and real estate investment declined. The Chinese government introduced was unveiling plans to stimulate domestic demand by providing subsidies and incentives for equipment upgrades and consumer product trade-ins. These measures are projected to generate over 5 trillion yuan ($704.23 billion) in annual equipment spending.
S&P found that local governments’ fiscal stimulus has been more significant and impactful in paid places over the years. Data from 2020 to 2022 showed that richer cities experienced a larger and more effective fiscal stimulus compared to poorer regions. Xu emphasized that industries, consumption, and investment would remain as key growth drivers in the foreseeable future. Furthermore, higher-tech sectors are anticipated to fuel China’s industrial upgrades and play a vital role in sustaining long-term economic growth.
China’s fiscal stimulus is facing challenges in its effectiveness due to high debt levels, diminishing returns, and economic slowdowns in key sectors. Local governments need to focus on streamlining regulations, improving business environments, and supporting long-term growth to navigate through these challenging times. Despite the hurdles, the emphasis on industrial advancements and consumption policies can potentially drive long-term economic growth in China.