By Kevin Yao and Joe Cash

China Increases Debt to Boost Economy

BEIJING (Reuters) – On Saturday, China announced plans to significantly increase debt to revive its struggling economy, but left investors uncertain about the size of the stimulus package vital for sustaining the stock market rally.

Finance Minister Lan Foan declared at a press conference that Beijing would help local governments with their debt problems, provide subsidies to low-income individuals, support the property market, and inject capital into state banks, among other initiatives.

These measures are aimed at countering the world's second-largest economy's loss of momentum, deflationary pressures, and low consumer confidence due to a significant downturn in the property market.

However, the lack of a specific dollar amount for the package has left investors anxiously awaiting clearer policies until the upcoming meeting of China's rubber-stamp legislature, which will authorize additional debt issuance. The date for this meeting is yet to be announced.

The conference was described as “strong on determination but lacking in numerical details,” by Vasu Menon, managing director for investment strategy at OCBC in Singapore. Menon expressed disappointment that the much-anticipated substantial fiscal stimulus did not materialize to maintain the stock market rally.

Recent economic data has consistently missed forecasts, prompting concerns that the government's goal of 5% growth this year may be unattainable. Critics warn of a potential deeper structural slowdown.

Upcoming data for September is expected to reflect further economic weakness, yet officials maintain “full confidence” in achieving 2024 targets.

There has been intense speculation surrounding new fiscal stimulus in global markets following a September meeting with members of the Communist Party, indicating an urgency about economic recovery. Chinese stocks surged 25% to two-year highs after the meeting but have since declined due to lingering uncertainty over policy details. Global commodity prices, including iron ore and industrial metals, have experienced volatility as well based on the notion that stimulus will invigorate demand.

Reuters previously reported that China aims to issue special sovereign bonds worth approximately 2 trillion yuan ($284.43 billion) this year as part of the new fiscal stimulus, focusing on aiding local governments with their debt and subsidizing consumer purchases.

Bloomberg News also indicated that China might inject up to 1 trillion yuan into state banks, although analysts remain skeptical due to weak demand for credit.

Stimulus Measures

In late September, the central bank announced significant monetary support measures, including interest rate cuts and a 1 trillion yuan liquidity injection to bolster the property and stock sectors. While these actions have improved market sentiment, analysts urge that China needs to address fundamental structural issues such as enhancing consumption and reducing dependency on debt-driven infrastructure investments.

The International Monetary Fund estimates central government debt at 24% of GDP, while overall public debt is roughly $16 trillion, or 116% of GDP. Lan stated that there is substantial room for further debt issuance and fiscal deficits, noting that local governments still possess 2.3 trillion yuan to utilize in the year's last quarter.

Low wages, high youth unemployment, and a deficient social safety net mean China's household spending is below 40% of economic output, significantly lagging the global average. Despite pledges over the last decade to boost domestic demand, progress has been limited and would entail a re-evaluation of existing policies.

Lan indicated that reforms will be implemented gradually. Huang Xuefeng, credit research director at Shanghai Anfang Private Fund Co, remarked that the focus is on financing the fiscal gap and addressing local government debt risks. Without specific measures to stimulate demand and investment, easing deflationary pressures remains challenging.