China’s policy moves lower growth risks

October 17, 2024 (MLN): A slate of economic policy announcements by the Chinese authorities should reduce downside risks to growth, Fitch Ratings says, but do not warrant upgrades to the agency’s real GDP growth forecasts of 4.8% in 2024 and 4.5% in 2025.

Greater fiscal support is supportive of growth, but a deterioration in government debt metrics would add to downside pressure on China’s sovereign rating depending on the degree to which it can induce an acceleration in underlying demand and ease deflationary pressures.

However, uncertainty persists around the magnitude and form of the fiscal response.

The Politburo’s September meeting readout pointed to a greater recognition of China’s economic challenges and increased urgency in addressing these through strengthened countercyclical monetary and fiscal policies.

Domestic demand remains subdued due to the property sector correction, weak household confidence from negative wealth effects, and modest income and employment growth, amid persistent deflationary pressures.

Saturday’s Ministry of Finance press conference contained no specific new fiscal measures, but indicated that incremental stimulus is likely to be a key tool in confronting growth and debt challenges.

Minister of Finance Lan Fo’an said the central government had scope to raise deficits and debt over the next few years, pointing to a further increase in its fiscal role.

This could imply wider fiscal deficits over the coming years than we forecast during our last sovereign rating review.

Fiscal policy was broadly neutral in over the first three quarters of the year, despite Fitch’s and the budget’s forecast of a slightly stimulatory stance.

The authorities now appear set to accelerate local government issuance of the unused special-purpose bond (SPB) quota.

This stepped-up issuance was included in our latest growth forecasts in September, but the risks of fiscal underspending in 2024 have reduced.

The fiscal policy announcements appear to be focusing on managing local government hidden debt risks through further “debt swaps” and recapitalising bank balance sheets.

Such measures are unlikely to significantly boost near-term economic activity, but could help address structural challenges from high economy-wide leverage, particularly among LGFVs, which have been exacerbated by weak nominal growth.

Details on more direct fiscal support measures are not yet fully clear, but the authorities have hinted at an increase in the deficit in 2025 as measures to support the property sector and consumption may be stepped up.
 

On the property side, this will imply greater local government purchases of idle property developer lands or excess housing stock for social housing using SPB proceeds.

Consumption measures could include an increased scope for the consumer goods trade-in programme and transfers to low-income households.

More details on the fiscal policy agenda are likely to emerge at the upcoming National People’s Congress (NPC) standing committee, as NPC approval is needed for fiscal measures.

Fitch’s baseline view is that direct fiscal support is likely to remain incremental but there is a possibility the package is larger than we expect. It is also unclear if this will provide a sufficient jolt to underlying demand and confidence.

Fiscal and growth prospects remain central to the evolution of China’s ‘A+’ sovereign rating, which we put on Negative Outlook in April.

A rising debt/GDP ratio could trigger further negative rating action. More fiscal support would raise nominal debt, but could also ease deflationary pressures, which are keeping nominal GDP growth low and worsening medium-term debt dynamics.

The People’s Bank of China has clearly increased monetary policy stimulus efforts and forward guidance indicates that additional easing is likely, particularly through reserve requirement ratio cuts.

While monetary stimulus can help to reduce growth risks, it is unlikely to boost growth prospects. Demand for loans appears weak due to poor confidence rather than the cost of finance.

Copyright Mettis Link News