Politicians, unless restrained by tight regulations on fiscal deficit parameters, tend to splurge at the first opportunity. When an economy is in trouble then a decision to pump-prime growth, through higher levels of government spends, is a no brainer. Most policy makers are rarely concerned about the longer-term implications of debt as that would be somebody else’s headache. The short-term, on the other hand, decides the next election. But in China, things tend to be different. Under the leadership of Xi Jinping, Beijing has been conservative in its economic and fiscal policies. Despite its economy being in the doldrums, mostly on account of a crippled real-estate market and tepid consumer sentiment, that failed to recover after Covid 19, the government abstained from big measures that require large spends.
But this strategy changed following the US elections and the threat of import tariffs by the incoming Trump administration. And about time, many analysts would argue. Price deflation continues to haunt the manufacturing sector as consumers defer purchases in the belief that goods will be even cheaper in the future. The government approved a package of Yuan 10 trillion (USD 1.4 trillion). A little more than half of this will go to local governments to refinance their debt, a lot of which is ‘hidden’ with the intent of dodging fiscal norms. The debt swap will reduce financial risks and borrowing costs. But the money expected to be saved in the next five years will amount to less than 0.1% of GDP over that period. That may be too little to get the economy back on track. China’s central government hates the financial indiscipline of local authorities, but it has not permitted an explicit default on their bonds. The recent package represents a pre-emptive effort to remove risks, rather than a hurried response to fiscal emergencies.
China’s policy makers have argued that there are other factors working through the system to help growth meet the official target of 5%. In July, for instance, they enlarged a scheme to urge consumers to trade in old cars and home appliances for new ones. Following a cut in mortgage costs, by the People’s Bank of China, and lower down-payment ratios, property sales have begun to rise in metropolitan cities. The government may also be keeping its ammunition dry until it knows how much damage Mr Trump’s incoming administration will inflict on their economy. Therefore, the current stimulus package is unlikely to be the last, as newer ones would be announced and appropriately directed, based on the emerging trade scenario and the economy’s response over the months ahead.
Financial markets reacted positively to China’s shift in policy with stocks rallying upwards. Foreign Institutional Investors dumped holdings in India, in favour of Chinese equities. This is on the expectations of a revival in consumer demand and greater spending by local governments as their financial situation recovers. Indian stocks, as your columnist has consistently argued, are grossly overvalued, with retail investors talking large punts on derivatives. The bubble in asset prices in India has begun to deflate and logic dictates that it will continue to do so. China, on the other hand, has been in the doldrums and should witness a sizeable recovery, as further packages are announced by its finance ministry.
The next important economic occasion in China’s schedule, is the Communist party’s conference in mid-December and the meeting of its legislature in March, when the budget and growth targets are announced. Perhaps, Mr Trump’s intentions will be clearer by then and so would China’s response strategy to drive growth.