China’s coming stimulus is necessary but likely insufficient
Subscribe to enjoy similar stories. Hopes for a massive fiscal stimulus have sent Chinese stocks on a roller-coaster ride in the past month or so. Now investors need cooler heads to assess what Beijing will actually say this week.
The standing committee of China’s legislature opened a session on Monday, and investors will be looking for indications of the size of any coming fiscal stimulus. Estimates vary but center on around 10 trillion yuan, the equivalent of $1.4 trillion. While the headline figure is important, investors should also look at how the money is actually spent.
Judging from what the government has said so far, it may not be all that stimulative. A big part of the program will likely be to restructure the debt of local governments. These local governments have racked up piles of debt over the years as they are responsible for the bulk of public spending from infrastructure to education, but lack reliable revenue sources to match.
That includes borrowing through some off-balance-sheet vehicles called local government financing vehicles, or LGFVs. Local governments used these obscure state-owned entities to sidestep borrowing limits imposed by Beijing. Goldman Sachs estimates that LGFV debt was around 60 trillion yuan at the end of 2022.
China’s housing market implosion has drastically reduced proceeds from land sales, a major source of income for local governments. They in turn have cut spending and raised fees levied on local residents, which has further depressed the economy. Goldman Sachs estimates there is a 2.3 trillion yuan government revenue shortfall this year.
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