Pictured here is a commercial residential property under construction on March 20, 2024, in Nanning, the capital of the Guangxi Zhuang Autonomous Region in southern China.
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BEIJING – China's fiscal stimulus is losing effectiveness and turning into a strategy to buy time for industrial and consumer policies, Yunbang Xu, a senior analyst at Standard & Poor's Ratings, said in a report on Thursday.
The analysis used growth in government spending to measure fiscal stimulus.
“From our point of view, fiscal stimulus is a time-to-buy strategy that could have some long-term benefits, if projects focus on reviving consumption or industrial upgrades that increase value added,” Xu said.
China has set a target for GDP growth of about 5% this year, a target that many analysts said was ambitious given the level of stimulus announced. The head of the top economic planning agency said in March that China would “strengthen macroeconomic policies” and increase coordination between fiscal, monetary, employment, industrial and regional policies.
High debt levels limit the amount of fiscal stimulus a local government can do, regardless of whether a city is considered a high- or low-income area, the S&P report said.
Public debt as a share of GDP could range from about 20% for the high-income city of Shenzhen, to 140% for the smaller, low-income city of Bazhong in southwestern Sichuan province, the report said.
“Given fiscal constraints and diminishing efficiency, we expect local governments to focus on reducing red tape and taking other measures to improve business environments and support long-term growth and living standards,” S&P's Xu said.
Shaw added, “Investment has become less effective amid the sharp slowdown in the real estate sector.”
The pace of fixed asset investment this year so far has picked up in March compared to the first two months of the year, thanks to accelerating investment in manufacturing, according to official data released this week. Investment in infrastructure slowed its growth, while investment in real estate declined further.
The Chinese government earlier this year announced plans to boost domestic demand through subsidies and other incentives for equipment upgrades and consumer product trade. These measures are officially expected to result in spending of more than 5 trillion yuan ($704.23 billion) annually on equipment.
On the fiscal front, the central government will provide “strong support” for such improvements, officials told reporters last week.
Standard & Poor's found that fiscal stimulus for local governments was generally larger and more effective in wealthier cities, based on data from 2020 to 2022.
“High-income cities lead because they are less vulnerable to declines in real estate markets, have stronger industrial bases, and have more resilient consumption in downturns,” Xu said in the report. “Industry, consumption and investment will remain the main drivers of growth in the future.”
“High-tech sectors will continue to drive China's industrial modernization and consolidate long-term economic growth,” Xu said. “However, excess capacity in some sectors may trigger price pain in the near term.”
