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China’s lawmakers began a week-long session on Monday that is expected to approve the country’s largest fiscal package since the pandemic to boost confidence in the world’s second-largest economy.
Beijing has not specified the scale of the measures, but lawmakers on Monday reviewed proposals to help resolve some of the trillions of dollars of debt weighing down China’s cash-strapped local governments, state media Xinhua reported.
Analysts believe China needs to spend up to Rmb10tn ($1.4tn) over three years to help reflate an economy been hit by a prolonged property slump.
But they warn that China will need to target fiscal spending not just at local government debt but also at households, which have suffered from the real estate crisis, if it is to rekindle confidence in the economy.
Fiscal easing “holds the key for the effectiveness of the ongoing stimulus package”, Goldman Sachs analysts said in a report, highlighting the importance of this week’s National People’s Congress standing committee meeting.
China’s stimulus drive started abruptly in late September when the central bank and other financial regulators announced interest rate cuts and other monetary measures to prop up the stock and property markets.
Economists believe China’s leaders became concerned after GDP in the three months to the end of September grew at a rate below the official annual target of 5 per cent for the second quarter in a row.
China is grappling with what some call a two-speed economy, with strong exports offsetting weak domestic consumption.
But market excitement over Beijing’s initial change of heart on the stimulus has been tempered by the slow release of details of the next phase of the campaign: the fiscal spending package.
NPC Observer, a website tracking China’s parliament, said the NPC would probably announce its decision on the fiscal package on state television evening news on Friday, with details to come later that day.
China’s deputy finance minister Liao Min said in Washington last month that the package would involve “a series of powerful measures” to resolve debt problems at local governments, which were heavily reliant on land sales until the country’s property bubble burst in 2021.
Xinhua reported that lawmakers on Monday reviewed a proposal to raise China’s local government debt limit to replace “hidden debt” — off balance sheet liabilities accrued by finance vehicles set up by lower-level authorities.
Xinhua did not provide a figure for the swaps but analysts believe local governments could issue up to Rmb6tn for the measure.
Liao said the policies would also aim to stabilise the real estate market and spur domestic demand with schemes to encourage industry to upgrade its equipment and consumers to replace home appliances and other goods.
Economists said the NPC could also approve an additional Rmb1tn in special sovereign bonds to recapitalise large state banks.
Goldman said the government might raise the official central government fiscal deficit target to 3.6 per cent of GDP next year from 3 per cent this year. It said the fiscal package would be smaller than during the Covid-19 pandemic and earlier years.
Most analysts cautioned that while tackling local government debt was good for financial stability and might spur some consumption if it led to the payment of civil servant salaries and arrears to suppliers, it would not add much to demand. Neither would the recapitalisation of banks.
“Any additional borrowing approved for these policies won’t provide much of a fiscal boost,” said Leah Fahy, China economist at Capital Economics.
Macquarie economist Larry Hu also warned that the aim of the stimulus was mainly to meet official growth targets.
“The stimulus measures announced so far are sufficient to achieve 5 per cent GDP growth this year but not enough to reflate the economy,” said Hu. “Consumer and homebuyer confidence remains low.”
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