China’s Minister of Finance, Lan Fo’an, recently announced that the central government has room to increase debt and the deficit, indicating that there is a large space for a deficit increase. This news was eagerly awaited by many investors and analysts who were hoping for a new stimulus package to be unveiled by China. Lan hinted that more stimulus is on the way and that changes to debt or deficit could be introduced in the near future. The details and size of the stimulus package are still unclear, leaving the markets to speculate on how it will impact the macro outlook.
The finance ministry also outlined policy measures aimed at addressing local government debt, stabilizing the real estate market, and supporting employment. These policies include allowing local governments to use special bonds for land purchases, using affordable housing subsidies for existing housing, and considering plans to reduce real estate-related taxes. However, no specific figures were provided, and it was emphasized that supporting the real estate market would require multiple policies. The importance of balancing the amount of stimulus with how it is used, whether for shoring up government finances or boosting consumption, was also highlighted.
Analysts have projected that China may need anywhere from 2 trillion yuan to over 10 trillion yuan in fiscal stimulus to boost the economy. With China’s retail sales growing modestly and the real estate sector showing signs of strain, there are concerns about the country’s ability to meet its full-year GDP target of around 5%. All eyes are now on October 18, when the National Bureau of Statistics is set to release third-quarter GDP figures, providing more clarity on the overall economic situation.
Following a weeklong holiday, mainland Chinese stocks experienced volatility as the stimulus-fueled rally lost momentum. The market declines pushed major indexes back to levels seen in late September. Earlier, there was a positive response in the markets after the Chinese government introduced various policy measures to stimulate growth. Measures included interest rate cuts, real estate support extensions, and a program allowing institutional investors to borrow funds for stock investing. Additionally, the National Development and Reform Commission promised to accelerate the use of funds earmarked for investment projects.
Looking ahead, analysts and investors are awaiting more details to be announced at a parliamentary meeting later in the month. It is considered prudent to retain some reserves in case of any unexpected shocks to the economy. With uncertainties surrounding the effectiveness and implementation of the proposed policies, the markets are likely to remain cautious. The focus remains on how China navigates its economic challenges and whether the stimulus measures will be enough to spur growth and stabilize various sectors like real estate and retail sales.
