China Considers Issuing 10 Trillion Yuan in Additional Debt to Stimulate Economy

China's Economic Stimulus Plan

After the recent "war" between Israel and Iran ended without significant impact, oil prices have rebounded, increasing by 1.4%. This rebound is largely due to a report from Reuters suggesting that China is contemplating the issuance of over 10 trillion yuan ($1.4 trillion) in extra debt over the next few years. This move is aimed at reviving China's struggling economy, and the fiscal package is expected to be further bolstered if Donald Trump wins the U.S. election.

According to two sources familiar with the situation, the Standing Committee of the National People's Congress (NPC), China's top legislative body, is expected to approve a new fiscal package. This package includes 6 trillion yuan, partly raised through special sovereign bonds, during a meeting scheduled for Nov. 4-8. The 6-trillion-yuan debt would be raised over three years, including 2024, with the proceeds primarily used to help local governments manage off-the-books debt risks.

Impact on the Global Economy

The total planned amount, to be raised by issuing both special treasury and local government bonds, represents over 8% of the world's second-largest economy's output. China's economy has been severely impacted by a prolonged property sector crisis and escalating debt of local governments. The news of China's proposed fiscal package led to a rise in oil prices and industrial metals; WTI was up 1% near $68 a barrel while copper rose 0.9%.

This report is the first confirmation of speculation among financial analysts who have predicted that Beijing would consider a 10 trillion yuan stimulus. However, the plans are not yet finalized and are subject to change, leaving room for uncertainty.

Stimulus Measures and Their Impact

The NPC Standing Committee is also expected to approve all or part of up to 4 trillion yuan worth of special-purpose bonds for idle land and property purchases over the next five years. This would be in addition to the usual annual issuance quota, which primarily funds infrastructure spending. The quota stood at 3.9 trillion yuan this year and 3.8 trillion in 2023.

This move is designed to enhance local governments' ability to manage land supply and alleviate liquidity and debt pressures on both local governments and property developers. Should the NPC Standing Committee approve these issuances in full instead of in stages, it could increase the total stimulus size to over 10 trillion yuan.

China's Fiscal Strategy

Beijing may announce a stronger fiscal package if Trump wins a second term as his return to the White House is expected to intensify the economic headwinds for China. Trump, who has gained in recent polls to erase much of the early advantage of Kamala Harris, has vowed to impose 60% duties on imports from China.

China began this year with plans to issue 1 trillion yuan in special sovereign debt already in place, but that sum is widely expected to be increased as growth has been drifting off target. Economists suggest a longer-term structural slowdown could be in play. However, the planned fiscal spending falls short of the firepower deployed in 2008, when Beijing's 4 trillion yuan in fiscal stimulus in response to the global financial crisis accounted for 13% of GDP at the time.

Additional Stimulus Initiatives

As part of the overall fiscal spending, China is also considering approving other stimulus initiatives worth at least one trillion yuan. These include a consumption boost involving trade-in and renewal of consumer goods. Another trillion yuan could also be raised via special treasury bonds for capital injection into large state banks.

However, even the 10 trillion yuan package may be insufficient to kickstart the economy. China's peak credit impulse, a crucial reflationary variable that propagates across the global economy, has dwindled, and so has the boost to growth. To achieve the same level of stimulus as a % of GDP, China would need to inject tens of trillions more.

Bottom Line

China's proposed fiscal stimulus is a significant move that could potentially impact the global economy. However, it remains to be seen whether this will be enough to revive China's struggling economy. As the world watches, the question arises: will China's proposed measures be enough, or will it need to inject more into its economy to stimulate growth? Share your thoughts and discuss this article with your friends. Don't forget to sign up for the Daily Briefing, available every day at 6pm.