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Upcoming Major Fiscal Stimulus Measures
Since September 24, 2024, the government has introduced a series of macroeconomic easing and real estate support policies. The market is currently anticipating the government to announce a large-scale fiscal stimulus package, with some market participants estimating its size to be over 10 trillion yuan.
In this report, we summarize the main directions that potential large-scale fiscal stimulus policies should focus on supporting. However, we believe a more reasonable expectation is that the government will introduce a relatively moderate fiscal stimulus package of 1.5 to 2 trillion yuan in the short term; and on top of our previous baseline forecast, fiscal policy support in 2025 may expand by an additional 2 to 3 trillion yuan.
Important policy timelines may include: fiscal stimulus policies for this year may be announced after the Golden Week holiday or around October 18th, when the third-quarter data is released, while fiscal stimulus policies for 2025 may be discussed and decided at the Central Economic Work Conference held in December 2024.
Policies already announced. Since September 24, 2024, the government has introduced a series of policies to support the real economy and financial markets.
Monetary policy easing includes a comprehensive interest rate cut of 20-30 basis points, a reserve requirement ratio reduction of 50 basis points, and the central bank has indicated that further reserve requirement ratio reductions are possible in the future.
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In terms of real estate policies, the government has reduced the minimum down payment ratio for second homes nationwide from 25% to 15%, lowered the interest rates for new and existing loans, significantly relaxed purchase restrictions in first-tier cities; most importantly, the Politburo meeting for the first time proposed to promote the stabilization and recovery of the real estate market.
Additionally, the central bank has created new monetary policy tools to support the stable development of the stock market, including stock buybacks and increased loans for share repurchases, supporting non-bank financial institutions to swap with the central bank to obtain liquidity, and encouraging corporate mergers and acquisitions.
Other policies include various measures to support the private sector and enterprises, as well as plans to increase core Tier 1 capital for large state-owned commercial banks.
The government has not yet announced a large-scale fiscal stimulus package or made significant adjustments to the real estate inventory reduction mechanism, but we believe the Politburo meeting has sent a clear intention for further policy support, which has also raised market expectations for these two policies.
The market's expectations for the scale of the potential fiscal stimulus range widely, from 2 trillion to over 10 trillion yuan (or 1.6-8% of GDP). Most investors are already aware of a report on September 26th, mentioning that the government may issue an additional 2 trillion yuan in government bonds to boost consumption and alleviate fiscal pressure on local governments. In addition, there are also reports that the government may issue 1 trillion yuan in special government bonds to increase core Tier 1 capital for large state-owned commercial banks.Additionally, some market participants are discussing the possibility of the government introducing a larger-scale fiscal stimulus, potentially reaching 10 trillion yuan or more (accounting for 8% of GDP), although it is currently unclear how much of this would be new stimulus and over what time horizon the policy would cover. If a larger fiscal stimulus is introduced, most expect the vast majority to be used to address the financing gaps and debt issues of local governments (including arrears to enterprises), and to significantly increase financial support for the real estate sector's inventory reduction efforts.
Furthermore, investors generally believe that the policy will include capital injections into large state-owned commercial banks, support for the residential sector through increased social spending and subsidies, and tax cuts and fee reductions for businesses.
What fiscal support policy assumptions are included in our current base forecast? When we revised down our GDP growth forecasts for 2024 and 2025 to 4.6% and 4.0%, respectively, in late August, we had already assumed that policy support would be further increased to boost economic growth within the year.
We estimate that the broad fiscal contraction in the first half of 2024 was 0.4% (as a percentage of GDP), significantly lower than the full-year broad fiscal expansion of 0.8-1% planned in the fiscal budget at the Two Sessions in March (for comparison, the broad fiscal contraction in 2023 was 0.5% of GDP).
We expect the government to accelerate the issuance and disbursement of government bonds and the pace of their use, and to provide financial support for the debt restructuring of local financing platforms, thereby partially offsetting the drag from weak fiscal revenues and expenditures in the first few months of this year. This means that we have assumed that the broad fiscal expansion in the second half of 2024 needs to be 1-1.2 trillion yuan, thereby driving the full-year augmented fiscal deficit to rise by 0.3-0.4% compared to 2023 (as a percentage of GDP). Additionally, our current base assumption is that the augmented fiscal deficit will expand by about 1% in 2025 (as a percentage of GDP), which includes the issuance of 1.5 trillion yuan in special treasury bonds and 4 trillion yuan in special local government bonds (compared to 1 trillion yuan and 3.9 trillion yuan in 2024), and a slight expansion of the general fiscal budget deficit ratio to 3-3.5%.
How large does China's fiscal stimulus policy need to be?
This depends on the goals the government plans to achieve. If the goal is for GDP growth in 2024 to approach the full-year economic growth target of "around 5%," then it may only be necessary to implement a fiscal stimulus of 1.5-2 trillion yuan as soon as possible. If the goal is to stabilize real estate market activity in the coming months, or to fully offset the drag of the real estate market downturn on the economy, and to reverse the downward spiral of price levels, business, and consumer confidence, thereby achieving GDP growth close to 5% in the next two years, we believe the government needs to introduce a larger policy stimulus, coupled with vigorous promotion of structural reforms. Furthermore, if the United States significantly increases import tariffs on Chinese products, the government will also need to introduce additional larger-scale fiscal stimulus.
Where does fiscal policy need to focus and how large might the scale be?
1) There is at least a 1.3 trillion yuan gap in fiscal revenue, which can be filled by issuing special or general treasury bonds. In the first eight months of 2024, we estimate the general public fiscal revenue gap (relative to the budget plan) to be 900 billion yuan (annualized scale of 1.3 trillion yuan), while fiscal expenditure is 430 billion yuan lower than the budget (annualized scale of 690 billion yuan). Local government land transfer income decreased by 25% year-on-year, which is 690 billion yuan lower than the fiscal budget's expectation of roughly flat (although our base forecast has already assumed a 10% decline), and the reduction in government fund budget expenditure (mainly financed by local government land transfer income and the issuance of special local government bonds) is even greater. Therefore, to achieve the 2024 general public fiscal budget plan (while temporarily ignoring the significant decline in government fund budget revenues and expenditures), the government needs to fill a financing gap of 1.3 trillion yuan.
2) The debt restructuring of local financing platforms and the payment of local financing platform accounts payable may require more than 1 trillion yuan and more than 2 trillion yuan, respectively. The UBS team estimates that as of the first half of 2024, the stock of interest-bearing debt of local financing platforms is about 65 trillion yuan. Thanks to debt restructuring with banks and the issuance of 1.4 trillion yuan in special refinancing bonds by local governments in 2023 to replace part of the local financing platform debt, the debt repayment pressure on local financing platforms has eased in the past year and a half. We believe that in the coming months, the government will need to issue more than 1 trillion yuan in special refinancing bonds for local governments, which can continue to utilize the remaining space between the local government debt limit and balance at the end of 2023 (1.43 trillion yuan), and issue an additional 1-2 trillion yuan in 2025. A more urgent issue to address is that we estimate that local financing platforms have trillions of yuan in non-interest-bearing liabilities in the form of accounts payable, and due to the shortage of local government funds, this liability scale may be significantly increasing. We estimate that local financing platforms currently need at least 2 trillion yuan in funds to reduce their accounts payable to a "normal" level and reduce arrears to the business sector.3) Provide residents with income and consumption subsidies of over 500 billion yuan. We believe this could include income subsidies of 100-200 billion yuan for those in extreme difficulty and the long-term unemployed; birth subsidies of at least 200 billion yuan per year for families with two or more children (covering from newborns to preschool age); and expanding the current subsidies for consumer goods trade-ins from 150 billion yuan per year to 300 billion yuan over the next 2-3 years. We also believe the government could increase tax deductions and/or raise the taxable income threshold for personal income tax for eligible residents, which could also bring over 100 billion yuan of support to the household sector.
4) Increase social welfare spending by more than 800 billion yuan per year. We believe that increasing social welfare spending, especially support for migrant workers, will help improve the social security system, promote social equity, and boost consumer confidence in the medium to long term. We estimate that doubling the basic pension payment standards for urban and rural residents (currently only 5% of the basic pension for urban workers) would benefit about 170 million residents in the short term, and in the long term, it would help boost the confidence of about half of the national population, requiring an additional 400 billion yuan in government spending per year. In addition, we believe the government could spend an additional 200 billion yuan to raise the contribution standards for the basic pension for urban and rural residents. A third possible direction for government support is to exempt the lowest 25% of income earners from personal contributions to basic medical insurance, which we estimate would require an additional 200-300 billion yuan in government spending per year.
5) 3 trillion yuan in real estate inventory reduction financial support. We estimate that China may need 3 trillion yuan in funds for real estate inventory reduction in 80 major cities (a static estimate). This could be supported by 3-4 trillion yuan in government special funds, which means the government would issue 1.5-2 trillion yuan in special treasury bonds or local government special bonds each year for two years, or it could be supported by the central bank's special re-lending tool to provide 3-4 trillion yuan at lower interest rates (to 1% or lower, currently at 1.75%) and longer terms (5-10 years or longer, currently 1-5 years) to promote the inventory reduction process.
6) Provide financial support of 500 billion to 1 trillion yuan to enterprises (including tax cuts and fee reductions). In recent years, the government has been using tax cuts and fee reductions for enterprises as the main channel for fiscal support to the economy, especially during the COVID-19 pandemic. In 2023, the government estimates that the scale of tax cuts and fee reductions will total about 2.2 trillion yuan (including the extension of tax cuts and fee reduction policies during the pandemic). In our base forecast for 2024 and 2025, we assume that the scale of tax cuts and fee reductions for enterprises will be 1 trillion yuan. We believe that the scale of further tax cuts and fee reductions may be limited, not exceeding 1 trillion yuan per year.
7) Inject at least 1 trillion yuan into state-owned large commercial banks. On September 24, 2024, the government announced plans to inject core tier-one capital into six state-owned large commercial banks, which may require financing through the issuance of government bonds or Central Huijin bonds. The UBS team estimates that the core capital ratio will increase by 1-2 percentage points, and Postal Savings Bank/Bank of Communications/Agricultural Bank may accept larger injections earlier, mainly due to their lower core tier-one capital ratios. UBS estimates that a 1 percentage point increase in the core tier-one capital ratio for Postal Savings Bank/Bank of Communications/Agricultural Bank would require injections of 86/90/221 billion yuan. Overall, we believe that this process may require at least 1 trillion yuan in funds over the next year or so.
What is the reasonable expectation for the scale and timing of fiscal stimulus?
Where should fiscal stimulus policies be directed? As mentioned earlier, the government may indeed need to introduce large-scale fiscal stimulus policies in 2024 and 2025 to alleviate local government revenue gaps and financing pressures, effectively promote the real estate inventory reduction process, and provide support for residents, enterprises, and the banking industry.
However, the Ministry of Finance is usually cautious, and fiscal resources are limited, with the main source of funds likely to come from additional issuance of government bonds.
At this stage, we believe that the central government may be unwilling to directly undertake large-scale local financing platform debt or directly provide fiscal financial support for real estate inventory reduction. The government may continue to promote the restructuring of local financing platform debt and the real estate inventory reduction process through banks or the central bank (through re-lending tools, etc.).
We believe that the central government may be more willing to provide one-time funds for local government budget revenue gaps, provide incremental bond financing for long-term projects, increase social welfare spending, and provide subsidies for residents.How large is the reasonable expected scale of fiscal stimulus?
Therefore, we believe that a more reasonable expectation in the short term is for the government to introduce fiscal stimulus of 1.5-2 trillion yuan, including support for residents and businesses, as well as filling local government revenue and financing gaps (and paying off debts to enterprises).
For 2025, based on our current baseline forecast assumptions (1.5 trillion yuan in special government bonds, 4 trillion yuan in local government special bonds, and a general public fiscal budget deficit rate of 3-3.5%), fiscal policy could potentially expand by an additional 2-3 trillion yuan to support areas such as increasing fiscal expenditure and support for the residential sector, debt restructuring of local financing platforms, and fiscal support for key structural areas.
Of course, if the United States significantly raises tariffs on Chinese products in the second half of 2025, the scale of fiscal support may be larger, or it may expand to destock the real estate market and provide funding support for exporters.
The above expectations for fiscal expansion in 2024-25 do not include the government's announced plan to inject capital into state-owned banks (which we estimate to be at least 1 trillion yuan).
When might fiscal stimulus policies be introduced? So far in 2024, the government has not introduced strong fiscal stimulus policies, which is somewhat surprising to us; we expect new fiscal stimulus policies to be announced in the coming days/weeks.
We believe the most ideal scenario would be to introduce fiscal stimulus policies immediately after the Golden Week holiday, which aligns with market expectations; however, we also think it is possible for related policies to be introduced around the release of third-quarter economic data on October 18th. We estimate that the economic data for September and the third quarter will indicate continued weak growth momentum, but high-frequency real estate sales data and consumption data during the Golden Week holiday in early October may show some improvement, especially the former.
For 2025, we expect that the annual Central Economic Work Conference, to be held in mid-to-late December 2024, will discuss in detail the policy support package and economic growth targets for the following year. By that time, the results of the U.S. election will have been announced, which also gives the government more time to assess external risks.
If decision-makers announce specific measures for strong medium-term fiscal stimulus policies and the advancement of major structural reforms in the next 2-3 years in the coming months, we believe this could exceed market expectations.
How large are the upside risks to economic growth forecasts?As mentioned above, our current base-case forecasts for GDP growth in 2024 and 2025 are 4.6% and 4.0%, respectively, which already assume that the government will increase policy support (including a further reduction of policy interest rates by 30 basis points in 2025) and introduce moderate fiscal stimulus measures.
So far, the policy support measures announced by the government have been largely in line with our expectations, although the government has also indicated that it will continue to increase policy support.
If the government introduces a fiscal stimulus package of 1.5-2 trillion yuan soon and implements most of the measures quickly, this year's GDP growth rate could reach 4.8%.
After that, if the government introduces a large-scale incremental fiscal stimulus in 2025 to stabilize real estate activity earlier than our current expectations, and the United States does not impose significant tariffs on China and the U.S. economy does not fall into recession, China's GDP growth rate could reach 4.5% in 2025.
If policymakers introduce a package of medium and long-term large-scale fiscal policies (including the measures discussed above) and specific measures to advance structural reforms in the next few months, this could exceed market expectations.
In our latest base-case forecast, we expect the exchange rate of the renminbi to the U.S. dollar to be around 7 at the end of 2024 and 2025. Although the above upside risk scenario implies a more accommodative monetary and fiscal policy, we expect the improved economic growth prospects to boost market confidence in the renminbi.
If other assumptions remain unchanged, the exchange rate of the renminbi to the U.S. dollar could rise to 6.9 and 6.8 at the end of 2024 and 2025, respectively.
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