China’s fiscal stimulus, as analyzed by S&P Global Ratings senior analyst Yunbang Xu, is facing challenges in its effectiveness. The strategy, according to Xu, is more of a tactic to buy time for industrial and consumption policies rather than providing immediate results. In measuring fiscal stimulus, the growth in government spending is used as a benchmark. Xu believes that fiscal stimulus is merely a short-term strategy that might have some benefits in the long run only if the projects are focused on reviving consumption or industrial upgrades that add value.
The Ambitious GDP Growth Target
China has set a GDP growth target of around 5% this year, a goal that many analysts consider ambitious given the level of announced stimulus. The head of the top economic planning agency emphasized in March the need to “strengthen macroeconomic policies” and enhance coordination across various sectors. However, the high debt levels in local governments pose a significant limitation on the amount of fiscal stimulus that can be undertaken. This limitation applies regardless of whether a city is classified as a high or low-income region.
According to the S&P report, public debt as a percentage of GDP can vary significantly among cities in China. For instance, the high-income city of Shenzhen has a debt-to-GDP ratio of around 20%, while the low-income city of Bazhong in southwestern Sichuan province has a ratio of 140%. This disparity in debt levels underscores the challenges faced by local governments in implementing effective fiscal stimulus. As a result of fiscal constraints and diminishing effectiveness, local governments are expected to focus on reducing bureaucracy and improving business environments to support long-term growth and living standards.
The analysis also highlights a shift in investment trends in China. While fixed asset investment has shown some improvement in March compared to earlier in the year, the property sector is experiencing a significant slowdown. Investment in manufacturing has accelerated, while infrastructure investment has slowed down. The Chinese government has announced plans to boost domestic demand through subsidies and incentives for equipment upgrades and consumer product trade-ins. These measures aim to generate over 5 trillion yuan ($704.23 billion) in annual spending on equipment.
The Role of Local Governments in Fiscal Stimulus
S&P’s findings reveal that local governments in China have been more proactive in implementing fiscal stimulus in wealthier cities. Data from 2020 to 2022 suggest that fiscal stimulus has been more substantial and effective in richer cities compared to their low-income counterparts. Xu emphasizes that industry, consumption, and investment will continue to be the primary drivers of economic growth in China. He predicts that higher-tech sectors will lead the country’s industrial upgrades and sustain long-term economic growth.
China’s fiscal stimulus faces challenges in terms of effectiveness, debt constraints, and shifting investment trends. While the strategy may provide short-term benefits, its long-term sustainability depends on targeted projects that promote consumption and industrial upgrades. Local governments need to navigate fiscal constraints and focus on improving business environments to support economic growth and living standards. By recognizing these challenges and addressing them proactively, China can enhance the effectiveness of its fiscal stimulus policies.
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