By Kevin Yao and Ziyi Tang

BEIJING (Reuters) – China's planned fiscal package addresses damaged property and local government balance sheets that hinder economic growth and contribute to deflationary pressures, acting more as a stabilizer rather than the immediate growth booster markets anticipated.

Larger-than-expected monetary stimulus last month sparked rampant investor speculation about a complementary, major fiscal program to instantly revive weak economic activity.

On Tuesday, Reuters reported China is considering approving new debt issuance of over 10 trillion yuan ($1.4 trillion) in the coming years.

Around 6 trillion yuan will primarily focus on reducing off-books debt of municipalities, while 4 trillion will fund buybacks of idle land from cash-strapped developers, aiming to alleviate a massive inventory of unsold flats.

These measures indicate a more measured approach to stimulus, moving away from previous broad strategies intended to boost growth.

In 2008, for instance, China invested heavily in infrastructure and property sectors to mitigate the global financial crisis's effects.

"The primary goal of this stimulus is clearly more about shoring up balance sheets rather than boosting near-term GDP growth," said Christopher Beddor, deputy China research director at Gavekal Dragonomics.

"It should ease the strains but not necessarily generate instantly higher spending."

This cautious strategy is partly shaped by the current issue of over-stimulation from past measures. However, it raises questions about the long- and short-term effects on growth.

The uncertainty is mirrored in financial markets, with Chinese stocks falling about 0.5% on Wednesday, dragging other Asian markets down.

"The package can be a painkiller, rather than a booster for the economy," stated Gary Ng, senior economist at Natixis. "The economic impact may not be as significant as it appears."

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Nonetheless, a program costing more than 8% of the world's second-largest economy's gross domestic product (GDP) cannot be overlooked.

"It’s not just about quantity. It’s about providing a sense of stability," explained Zong Liang, chief researcher at state-owned Bank of China.

Local governments, burdened by high debt and declining revenues, have been reducing civil servant salaries and cutting other expenses. Property developers in financial distress have been unable to resume work on incomplete projects, impacting jobs and incomes.

China aims to unblock the monetary flow to businesses and consumers by moving liabilities onto the central government's more robust balance sheet, which carries only a 24% GDP debt load.

"Policymakers seem to recognize a significant liquidity squeeze among local governments, largely due to the property downturn, leading many local authorities to cease staff and supplier payments," Gavekal's Beddor noted.

Alleviating that squeeze would release resources into the real economy, but the impact may be noticeable only in the second half of 2025.

Another unresolved issue is whether the package simply delays the impending debt crisis.

The International Monetary Fund estimates explicit local government debt at 31% of GDP at the end of 2023, with finance vehicles adding another 48%, and other government-related debt at another 13%.

Including the central government's debt, the total amounts to 116 trillion yuan, according to IMF calculations.

Regarding the property sector, Goldman Sachs estimates the unsold real estate inventory, if fully developed, would total 93 trillion yuan.

Overcoming past imbalances relies on the package's ability to initiate a virtuous growth cycle which could enable China to manage, rather than merely transfer, these liabilities.

Many analysts contend that a long-standing household consumption deficit limits such potential.

Low wages, high youth unemployment, and a fragile social safety net keep China's household spending below 40% of GDP, approximately 20 percentage points off the global average.

While Beijing is also expected to introduce consumer subsidies for appliances and other goods, the amount will constitute a minor fraction of the gap.

"It seems support for consumption remains modest," stated Louis Kuijs, chief Asia economist at S&P Global.

"That indicates an unlikely scenario for a substantial improvement in economic growth or for deflationary risks to be resolved."