China unveils $1.4 trillion fiscal stimulus to support economy

China has rolled out a substantial Rmb10 trillion ($1.4 trillion) fiscal package aimed at bolstering its weakening economy and providing relief to local governments, as it braces for potential trade tensions with the US under Donald Trump.

This fiscal plan, one of the largest aimed at addressing the country's local authorities’ financial challenges, has nonetheless fallen short of investor expectations, particularly those hoping for more direct support to stimulate household consumption in the world’s second-largest economy, Caliber.Az reports citing FT's article.

Announced on November 8 by the National People’s Congress (NPC), China’s rubber-stamp parliament, the package follows a major monetary stimulus plan unveiled in September, the largest such measure since the pandemic.

As part of the bailout, local governments will be allowed to issue bonds over three to five years to restructure an estimated Rmb14 trillion in “hidden” or “implicit” debts, according to finance minister Lan Fo’an, who spoke at a rare press briefing at the Great Hall of the People in Beijing.

These hidden debts are primarily held by off-balance sheet financing vehicles, which local governments use to fund infrastructure and property projects. Many of these investments soured when China’s real estate market entered a steep decline three years ago, severely impacting local government finances and undermining broader economic stability.

“There is a sense of disappointment in markets — yields are lower and the yuan is weaker,” said Mitul Kotecha, head of emerging market macro strategy for Asia at Barclays, in response to the fiscal measures. On Friday afternoon, China’s renminbi had dropped 0.3% to less than Rmb7.16 against the dollar. This followed the central bank’s decision on November 7 to set the daily yuan fix at its lowest in a year, at Rmb7.166, as the US dollar strengthened after Trump’s election win.

Lan announced that Beijing would authorize local governments to issue Rmb6 trillion in new bonds over the next three years for the debt restructuring process and reallocate an additional Rmb4 trillion in bonds, previously planned for other purposes, over five years. This restructuring will allow local governments to swap these bonds with those from their financing vehicles, thus consolidating the debts on their own balance sheets. The move would reduce financing costs by Rmb600 billion, Lan added.

Once the restructuring and an additional slum redevelopment debt program are implemented, Lan expects the hidden debts to be reduced to Rmb2.3 trillion. This would free up resources that were previously “constrained” by debt, allowing local governments to redirect spending towards development and public welfare initiatives.

While additional stimulus measures are under consideration, Lan said officials are “studying” steps to recapitalize large banks, purchase unfinished properties, and boost consumption. “We are planning the next phase of fiscal policy and intensifying countercyclical adjustments,” he noted.

Despite these efforts, analysts argue that China must address broader economic issues, such as the ongoing housing slump before it faces the prospect of a 60% increase in tariffs from the US, which could severely impact its exports. Should these tariffs be fully implemented without Chinese countermeasures, they could reduce China’s GDP by several percentage points at a time when the economy is particularly vulnerable.

“There has been such a build-up in expectations for this NPC meeting that the market was hoping for more,” said Barclays’ Kotecha. He suggested that China may be holding back some fiscal firepower for potential use in response to future tariff threats from Trump.

Larry Hu, an economist at Macquarie, called the announcement “disappointing for those who were expecting a massive fiscal package,” but added that the expectations were unrealistic. “The policy goal is to achieve the GDP growth target and reduce tail risks, not to reflate the economy in any meaningful way,” he said.

China’s stimulus efforts became more urgent in September after it became clear that third-quarter GDP growth, which came in at 4.6% year-on-year, was on track to miss the official 5% annual target.

Meanwhile, US-listed shares of major Chinese companies, including Alibaba and JD, were trading lower in pre-market sessions in New York. Commodities, such as Brent crude and iron ore, also saw declines, suggesting a slowdown in growth expectations for China. The Australian dollar, which is closely linked to Chinese economic performance, weakened by 0.6%.

By Tamilla Hasanova