China’s fiscal stimulus strategies have become a topic of debate, with concerns about their effectiveness rising. According to S&P Global Ratings senior analyst Yunbang Xu, the fiscal stimulus is losing its effectiveness and is now more of a strategy to buy time for industrial and consumption policies. The analysis used growth in government spending as a measure of fiscal stimulus, indicating that the current approach may not be yielding the desired results.
Xu pointed out that fiscal stimulus could have some longer-term benefits if projects are focused on reviving consumption or industrial upgrades that increase value-add. However, with the target of around 5% GDP growth set for this year, many analysts view this goal as ambitious given the level of announced stimulus. This raises questions about whether the current strategy is sustainable in the long run.
The high debt levels in China limit how much fiscal stimulus a local government can undertake, regardless of its income level. This is evident in the varying levels of public debt as a share of GDP across different regions, with disparities ranging from 20% to 140%. The report highlighted that fiscal constraints and diminishing effectiveness may compel local governments to focus on reducing red tape and improving business environments for long-term growth and living standards.
Xu also noted that investment is less effective amid a drastic slowdown in the property sector. While fixed asset investment picked up pace in March, there were disparities in growth rates across different sectors. Investment in manufacturing accelerated, while infrastructure investment slowed and real estate investment dropped further. This indicates a need for a more balanced approach to investment strategies.
Looking ahead, the Chinese government has announced plans to bolster domestic demand with subsidies and incentives for equipment upgrades and consumer product trade-ins. This move is expected to create a significant amount of annual spending on equipment, with strong support from the central government. S&P found that local governments’ fiscal stimulus has been more effective in richer cities, suggesting a need for a more inclusive approach to ensure sustainable growth.
The effectiveness of China’s fiscal stimulus strategies is facing scrutiny due to diminishing returns and high debt levels. The current approach may be more of a buy-time strategy rather than a sustainable solution for long-term growth. As the focus shifts towards industrial and consumption policies, there is a need for greater coordination among fiscal, monetary, and other policies to achieve balanced growth. It is crucial for China to address these challenges and adopt a more effective and sustainable approach to fiscal stimulus in the future.