China is rolling out incentives to spark consumer spending in goods ranging from air conditioners, to cars to new houses. The various programs are designed to lift the hardest-hit sectors and meet an "around 5%" economic growth target set at the government's recent "Two Sessions" planning event.

S&P Global Ratings views these programs as expanded versions of or new twists to existing policies. We see them as China's effort to reprioritize goals and reallocate resources.

They include:

• Three Major Projects focusing on urban-village reconstruction, affordable housing, and other infrastructure;
• the Three New Goods to increase value-added and "new economy" industrial production"; and
• a consumer goods trade-in program and a promotional campaign of new energy vehicles in rural areas that give consumers incentives to upgrade products from sofas to air conditioners to cars.

China also upgraded its coordination mechanism and "white list" scheme to smooth conflicting interests among housing and financial regulators. The aim is to boost homebuyer confidence by improving delivery of pre-sold homes.

In this FAQ, we look at the potential scope and credit implications for property sentiment, banks, local-government financing vehicles, industrials, and other areas. We believe some sectors will be clear beneficiaries of these programs. For others, the situation could have downsides, including higher debt or exposure to riskier assets.

Frequently Asked Questions

Will China meet its "around 5%" GDP growth target for 2024?

Louis Kuijs, Asia-Pacific chief economist:   We are sticking with our estimate that GDP growth will slow to 4.6% in 2024 from 5.2% last year. That said, we may see additional stimulus announced later in the year to ensure the growth target is achieved.

The 2024 target is harder to reach organically than a similar target in 2023 because the favorable impact on growth from the post-pandemic re-opening is largely over. That is true even as the drag on growth from the real estate downturn should be smaller this year.

The policy stance as confirmed during the two sessions supports growth. But, in our view, policymakers remain reluctant to pursue significant macroeconomic stimulus, especially toward households. Fiscal policy is only slightly expansionary, and the government has refrained from committing to material consumer-oriented stimulus. And the central government push to rein in infrastructure spending in highly indebted provinces will weigh on growth.

Monetary policy is likely to support growth. Despite limited room to cut interest rates, the People's Bank of China received a mandate to ensure ample liquidity and maintain credit growth at a rate faster than the nominal GDP growth rate. That said, credit growth will slow down from last year's rate (see "Credit FAQ: Policy Implications Of China's 2024 "Two Sessions", published on RatingsDirect on March 17, 2024).

What role will the local government financing vehicles (LGFVs) play in the Three Major projects, and will this impede their efforts to deleverage?

Laura Li (infrastructure ratings):  Land and development-focused LGFVs from the megacities will play a key role in executing the Three Major Projects initiative. The overall increase in LGFV sector debt will be about 1%, given some of existing related projects could be repackaged and resources from other types of infrastructure investments may be redirected to meet this objective.

The initiative could reach Chinese renminbi (RMB) 3 trillion to RMB4 trillion in policy-driven land and property development over 2024-2025, including the folding-in of existing plans. We expect LGFVs will borrow to fund roughly half of this. Hence, this will increase financial and property-market risks for LGFVs involved.

On the other hand, the bulk of the projects will be focused in the megacities where demand is stronger. Moreover, the projects will be structured with a stronger focus on cash flow than traditional policy-led LGFV investment. This could help with the commercial transition of some LGFVs and put some vehicles on a more self-sustainable path (see "China LGFVs' Bigger Housing Role: Risk Controls Matter," March 27, 2024).

Will local government spending and debts skyrocket to finance the Three Major Projects?

Wenyin Huang (international public finance [IPF] ratings) and Ryan Tsang (financial institutions ratings and IPF):  No, we don't think the local and regional governments (LRGs) will materially increase spending because of these initiatives. This is given headwinds for LRG revenue and the largely unchanged new quota for special-purpose bonds, the LRG's primary funding channel.

Our view is on the sector level. While some governments or their LGFVs will raise new debt to fund projects, others will scale back their debt-raising plans. Local governments, potentially under the central government's coordination, will reprioritize goals and reallocate funding accordingly to limit overall borrowing needs. For example, increased housing-related spending in the megacities may occur in parallel with cutbacks in airport or highway projects in other regions.

How are banks participating in the two property-related programs of the Three Major Projects, and what will be the impact for them?

Mr. Tsang:  Policy banks will continue to take a lead role in funding many of these policy-driven property-related projects, in our view. The large commercial banks are likely to participate in a selective manner.

S&P Global Ratings believes:

• The impact on policy banks and participating commercial banks will be uneven, driven by the intensity of their participation and their existing expense and funding structure.
• The involvement of commercial banks is rather manageable, in our view, and the effect is unlikely to be significant.
• For policy banks, a low cost-income ratio (e.g. at 8% for China Development Bank in 2022) provides flexibility to make such loans.
• Given policy banks' mandate, a low interest margin is expected. These loans are not likely to drive their existing low net interest margin much lower.
• Net population flow of a city/region and household income growth would be important factors in supporting project cash flow and hence underlying credit risks to banks.

As at mid-March 2024, some 30 cities have together obtained more than RMB1 trillion of banking facilities for urban village renovation, and north of RMB100 billion loans have been extended. In 2023, policy banks and some large commercial banks participated in a RMB100 billion loan program to finance the purchase of affordable rental houses in eight pilot cities (Tianjin, Chengdu, Qingdao, Chongqing, Fuzhou, Changchun, Zhengzhou, and Jinan).

Interest rates for these loans were low and loan tenors were long. For the RMB100 billion affordable rental house loan program, the lending rate was under 3%, while the loan tenor was up to 30 years. The take-up of this program has been low so far because of poor demand in the current weak property market.

Authorities recently increased the scale of China's program to boost trade-ins of consumer goods, including home appliances and home decor goods. Will this benefit the retailers?

Sandy Lim (corporate ratings, consumer goods):  Yes. We anticipate the consumer goods trade-in program will boost consumer demand and could improve consumer sentiment, and that could benefit Chinese retailers and household appliances manufacturers in general. Consumers will get some discounts off retail prices as an incentive to participate in the program. Larger retailers with established trade-in programs and household appliances makers with product technology edges could benefit from this program.

Household appliance sales stabilized and grew 2.6%% in the first two months of 2024, after two consecutive years of 2%-3% decline in 2022 and 2023. The weak property market has been the main drag for this sector, given large white goods such as refrigerators, stoves and air conditioners drive about 80% of consumer appliances. While property market is likely to stay soft near-term, we now expect this category to grow at 3.5% in 2024. A shortening replacement cycle and upgrades will support the growth. The trade-in program will bring in additional volume.

China retail sales grew 5.5% in the first two months of 2024. We foresee Chinese consumers will stay cautious in spending. Still, sentiment is improving a touch, as indicated by a slowing trend in the growth of household saving deposits. And we expect some bipolarization, with some consumers seeking premium product to improve quality of life.

How will the electric vehicle (EV) push to rural areas affect automakers? Are there enough charging stations to support that?

Claire Yuan (corporate ratings, heavy industries):  The government's "EV going to the countryside" campaign will help to further increase EV consumption in rural areas over the next three to five years, thanks to wider product availability and improving public charging infrastructure. Given lower EV penetration in the rural areas, we think this could be a growth driver. In 2023, EV sales via the campaign rose over 20% to 3.2 million units.

The rural purchases will mainly benefit auto makers that operate in the mass-market segment, such as BYD (non-rated), SAIC-Wuling (non-rated), and Geely Automobile Holdings Ltd. (BBB-/Negative/--), given that affordability is an important factor for consumers in less economically developed areas.

With policy support, the number of EV models available for sale in rural areas will likely continue to grow, after having increased to 69 in 2023 from 34 in 2021, according to industry association data.

Meanwhile, bottlenecks on public charging infrastructure will gradually ease. At the end of 2022, every 21 EVs registered in a rural area shared one public charging point in that area, compared with the national average level of seven EVs per public charging point.

Local governments are taking measures to promote the building of charging infrastructure in counties and towns. More charging facilities operators are formulating detailed plans to better penetrate rural areas given less competition and high growth potential. EV penetration in rural area was only 4% in 2022, versus the national average of 25%.

What's the aim of the property project white list and how will it help the housing market?

Esther Liu and Fan Gao (corporate ratings, real estate):  The aim is to boost homebuyer confidence by ensuring deliveries. China's developers depend heavily on presales that can be launched early in the development process. Buyers stay away if they fear that developers don't have the cash to complete a pre-sold project.

We believe uncertainty on delivery is a major overhang in the market. Last year sales sharply declined in the primary housing market (new developments), but increased by about 30% in secondary-housing markets, by our estimates. This outperformance in the secondary market also shows that homebuyers still have purchasing power.

Chart 1

The white list is not a bail-out for developers. Rather, the aim is to fast-track loans for ongoing projects--unlike past such initiatives, nondistressed projects are included. Developers receiving loans can use it for projects only—not to help the company meet debt obligations (see "Credit FAQ: Will China's 'White List' Boost Housing Sentiment?" March 26, 2024).

Will the white list raise the banking sector's exposure to property sector?

Ming Tan and Phyllis Liu (financial institutions ratings):  Yes, but we don't expect a major jump in bank loans to property developers. The banks remain generally cautious and have thus far managed to limit exposures, despite a number of other property-boosting policies. Last year, for example, the banking sector's property-development loans expanded by 1.5%, much slower than total loan growth of about 11%.

By our estimates, the pace of property loans will pick up slightly in 2024 but remain in low single digits. Financial institutions will maintain their underwriting standards and can decline lending to whitelisted projects that fail to meet these standards.

Commercial banks on average have a manageable exposure to property development loans, which account for just 6%-7% of their total loan portfolio.

Related Research

• China LGFVs' Bigger Housing Role: Risk Controls Matter, March 27, 2024
• Credit FAQ: Will China's 'White List' Boost Housing Sentiment?, March 26, 2024
• Economic Outlook Asia-Pacific Q2 2024: APAC Bides Its Time On Monetary Policy Easing, March 26, 2024
• Credit FAQ: Policy Implications Of China's 2024 "Two Sessions", March 17, 2024