China’s fiscal stimulus measures are losing their effectiveness, S&P says

BEIJING – China’s fiscal stimulus measures are losing their effectiveness and are more of a strategy to buy time for industrial and consumption policies, S&P Global Ratings senior analyst Yunbang Xu said in a report Thursday.

The analysis used government expenditure growth to measure fiscal stimulus.

“In our view, fiscal stimulus is a buy-time strategy that could have longer-term benefits, if projects are aimed at reviving consumption or industrial upgrades that increase value-added,” said Xu.

China has set a target of GDP growth of around 5% this year, a target that many analysts say is ambitious given the level of stimulus measures announced. The head of the top economic planning agency said in March that China would “strengthen macroeconomic policies” and increase coordination among fiscal, monetary, employment, industrial and regional policies.

High debt levels limit how much fiscal stimulus a local government can undertake, regardless of whether a city is considered a high- or low-income region, the S&P report said.

Public debt as a percentage of GDP could range from around 20% for the high-income city of Shenzhen to 140% for the much smaller low-income city of Bazhong in southwestern Sichuan province, the report said.

“Given budget constraints and declining effectiveness, we expect local governments to focus on cutting red tape and taking other measures to improve the business environment and support long-term growth and living standards,” S&P’s Xu said .

‘Investments are less effective during this period [the] drastic slowdown of the real estate sector,” Xu added.

Fixed asset investment rose for the year to date in March compared to the first two months of the year, thanks to an acceleration in investment in the manufacturing sector, according to official data released this week. Investments in infrastructure slowed growth, while real estate continued to decline.

The Chinese government announced plans earlier this year to boost domestic demand with subsidies and other incentives for equipment upgrades and trade-ins of consumer products. Officially, the measures are expected to generate more than 5 trillion yuan ($704.23 billion) in annual spending on equipment.

Officials told reporters last week that the central government would provide “strong support” for such upgrades on the budget front.

S&P found that local government tax incentives in wealthier cities have generally been larger and more effective, based on data from 2020 to 2022.

“Higher-income cities have an advantage because they are less vulnerable to downturns in real estate markets, have a stronger industrial base and their consumption is more resilient in times of recession,” Xu said in the report. “Industry, consumption and investments will remain the main growth drivers in the future.”

“High-tech sectors will continue to drive China’s industrial upgrade and anchor long-term economic growth,” said Xu. “That said, overcapacity in some sectors could lead to price pain in the near term.”