China’s $217 billion attempt to stimulate a sluggish economy

The trillion yuan ($217 billion) stimulus plan China rolled out this week underscores how concerned President Xi Jinping and other Beijing policymakers have become over the sluggish state of their economy.

For the first time since 2008, China’s government has announced an increase in its budget deficit outside of the normal budget cycle, announcing a sovereign debt issue that will increase the deficit from a 3 per cent ceiling in the original budget to 3.8 per cent, the largest deficit in 30 years.

The stimulus is the latest and biggest of an otherwise piecemeal effort to boost growth that has been anaemic and fragile by China’s standards.

The spending, earmarked for infrastructure investment primarily in regions in north-east China hit by floods and other natural disasters, is also a departure from Beijing’s traditional approach of using local governments and their balance sheets as the conduits for stimulus measures.

That’s presumably because, with their revenues ravaged by the implosion of China’s property sector, the debt levels of local governments are too severe for them to borrow any more, and therefore the central authorities opted to issue sovereign debt to fund the package.

By China’s standards, the plan is relatively modest – in 2008, in response to the global financial crisis it injected stimulus that amounted to more than 12 per cent of GDP – which perhaps points to concerns about the overall debt levels within the economy, much of it at the local government level.

China’s total debt-to-GDP ratio, without taking into account the hidden borrowings local governments might have in their off-balance-sheet financing vehicles, is about 280 per cent.

Interesting timing

The stimulus, half of which will be deployed early next year, was announced after Xi and other senior officials made a visit – unprecedented for him during his decade as president – to China’s central bank earlier this week, perhaps to send a signal of how seriously he is taking the state of the economy and financial markets.

He also held discussions with China’s sovereign wealth fund, which has been buying shares and exchange-traded funds in recent weeks in an attempt to shore up a market that has slumped more than 16 per cent since it started to become apparent in early February that China wasn’t producing the big economic bounceback from the pandemic that other major economies experienced.

The timing of the decision to increase the budget deficit is interesting, coming just ahead of a meeting of the Communist Party next week. That gathering is a financial policy forum held once every five years and can be expected to canvas policy options for dealing with some of the structural challenges China is experiencing.

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While China did post reasonably solid economic growth of 4.9 per cent in the September quarter, which ought to be sufficient to let it meet its target of annual GDP growth of around 5 per cent, the economy has failed to build any real momentum after the country’s re-opening from its stringent “zero COVID” lockdowns and travel restrictions late last year.

The worsening property collapse, consumer caution, weak exports and under-utilised factories, high levels of youth unemployment, the gathering pace of the shifts in global supply chains post-pandemic towards re-shoring, near-shoring and friend-shoring, and the intensifying trade tensions with the US and increasingly Europe are all weighing on the economy.

It hasn’t helped that Beijing cracked down on the big private sector technology and finance companies over the past two years while increasing its support for state-owned entities, effectively trading reduced growth for greater control. The disparity in treatment has been a factor in the private sector’s lower contribution to growth.

Similarly, the use of revamped espionage laws to raid foreign consultancies and cut off foreign companies’ access to economic data has scared off foreign investment.

Economists within and outside China believe that the challenges the economy is experiencing, in particular the high debt levels and the trauma within the property sector, will constrain growth for some years to come. The growth rates over the next few years are expected to be somewhere between 4 and 5 per cent, a far cry from the high-single-digit growth rates China experienced in pre-pandemic times.

Ambitious goals

That puts a major question mark over China’s ambition of toppling the US as the world’s largest economy, and Xi’s stated ambition of achieving the per capita income of a “mid-level developed country” by 2035. China’s per capita income today is around $US21,400 ($34,000).

A New York Federal Reserve Bank research report last week titled Can China catch up with Greece? puts all that – and Xi’s ambitions – into context.

The researchers, Hunter Clark and Matthew Higgins, while unclear as to the peer group Xi was referring to, decided to use the 32 advanced economies with per capita incomes ranging from Greece’s $US36,900 to Singapore’s $US127,600 to assess China’s prospects of achieving Xi’s goal.

They said China would need to increase its per capita income by 2.3 times to achieve the bottom of the 25th percentile of the advanced economies, requiring an average growth rate of 6.6 per cent to achieve that threshold by 2035. Annual income growth of 4.3 per cent would be needed to match Greece’s current level of per capita income.

China has achieved those sorts of numbers, or better, in the past. Per capita income grew at a rate of 6.5 per cent between 2009 and 2022 and was in high single-digits in the 1980s and early 1990s. From around 2008, however, the rate of income growth has, using the official data, been slowing.

There is, as the researchers noted, considerable scepticism over the accuracy of that official data, which many believe tends to overstate China’s economic performance. Using adjusted data would show growth slowing to 4.4 per cent from 2009 to 2022 and even below that in the past five years, which would be barely sufficient to make it the bottom of the advanced economy ranks by 2035, they said.

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China’s population is ageing and declining – according to projections from the United Nations China’s working age population will shrink by 6 per cent by 2035. There are also diminishing returns from its high levels of investment and, given it already has high levels of productivity, further material growth in productivity is unlikely. The NY Fed’s researchers expect income growth to be held below 4 per cent.

Beyond those factors, there are also the high private sector and local government debt levels, the depressed state of a property sector that (with related activity) used to contribute as much as 30 per cent of GDP, continuing weak consumption and the increasingly centralised and heavy-handed state and Communist Party-led management of the economy in recent years that will weigh on its growth rate.

And then there are the trade tensions and the de-risking of supply chains by China’s major trade partners and the proliferation of export controls aimed at limiting China’s access to leading edge Western technologies.

That’s why the researchers concluded it was unlikely that China could achieve Xi’s target by 2035.

Others have concluded for similar reasons that, where once it appeared certain that China would overtake the US in terms of the simple scale of their economies – there were many who thought that would happen this decade – that moment has been pushed into the 2030s, with no certainty that it will ever happen.

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