China's new planned stimulus measures, announced over the past few weeks, could boost consumer and homebuyer sentiment. It could also possibly lead to some upward revision in S&P Global Ratings' GDP forecasts for 2025. However, we do not think the package amounts to a "big bang" style stimulus.
The fresh initiatives aim to provide relief to local governments, rebuild market confidence, stabilize property prices, and encourage consumption. They include cheaper and easier access to home-mortgage loans; more government funds for destocking property inventories; and giving local governments more leeway to manage hidden debts and undertake stimulus. Officials also mooted plans for more consumption-related boosts.
S&P Global Ratings analysts across key China sectors recently gathered to debate questions we frequently receive from investors.
Frequently Asked Questions
Will these measures and fiscal steps change the economic growth outlook?
Louis Kuijs (Asia-Pacific Chief Economist): The monetary easing, measures to support the property and equity market, and fiscal steps of recent weeks are welcome. The policy action should help improve confidence in the economy and the property market and reduce downside risks to growth.
Gauging the economic impact is not easy since the size of fiscal stimulus is not yet clear. Our preliminary assessment suggests that the measures announced so far are unlikely to change the economic growth outlook in a major way. Monetary easing doesn't have a significant effect at times of weak confidence and demand for credit.
The measures to support the property market are helpful. Yet, given the weak sentiment and large stock of unsold housing, the property steps are unlikely to stabilize the housing market in the near future.
On the fiscal side, some meaningful steps have been announced, notably to address local government debt problems and support the property market. The Ministry of Finance (MOF) announced a modest amount of new short-term fiscal stimulus, and no substantial support for households and consumption. It indicated further fiscal stimulus could be implemented later but gave no indication as to the size or nature.
In our September outlook we projected 4.6% GDP for 2024 and 4.3% for 2025. We think the range of measures has titled the balance of risk to the upside, notably for 2025. We will revisit our economic outlook in November.
What kind of policy action would in your assessment substantially improve the growth outlook and fight deflation?
Mr. Kuijs (Economics): For that to happen, the housing market will need to be turned around and consumption lifted sustainably. On the housing front, substantial action would need to be taken to support developers' funding conditions and reduce the stock of unsold housing. Property-related measures taken so far are important in terms of strengthening the policy direction, however, they are unlikely to be enough.
A sustained lift in consumption calls for a combination of substantial short-term stimulus with structural measures to make people feel more comfortable economically. That means material structural measures around health, education or social security to entice households to spend more freely. Such structural reforms to support consumption has not materialized as of now.
In terms of possible implications for the growth outlook, key events to watch are whether in end-October the official 2024 budget deficit will be raised and what the language on fiscal policy for 2025 is after the December Central Economic Work Conference.
What's the impact of the fiscal stimulus measures on the sovereign rating on China?
Rain Yin (Sovereigns): It depends on the size of new government debt to be issued, how quickly they will be rolled out, and whether the government continues to maintain the size of its extrabudgetary bond issuances. Most importantly, however, it will depend on how quickly the Chinese economy regains a self-sustained growth momentum.
We expect the recently announced measures to result in new issuances of government debt amounting to several trillion renminbi (RMB) over the next three years or so. Most of these new debts would be used to refinance existing local government off-balance sheet obligations that we consider to be government contingent liabilities. Consequently, only a small portion of the new debt will result in new funds flowing directly into the economy.
The fiscal and debt assessments on China are already weak. They reflect our views that the increases in government debt will remain relatively high over the next few years. At this stage, it's uncertain if the additional new issuances will materially worsen fiscal support for the ratings.
The government may not issue as much debt as we project if economic momentum rebounds and the real estate sector stabilizes. This would allow the government to reduce its budget deficit target and cut issuances of local government special purpose bonds. In recent years, local governments have shown some reluctance to issue such bonds owing to the dearth of suitable projects.
It's also possible the government will cut special-purpose bond issuances if the real estate sector stabilizes in the near future.
How can local governments contribute to economic support?
Wenyin Huang (International public finance): The announced measures can increase economic activity by allowing unused bond proceeds to be diverted into new areas. This could be particularly for land repurchasing, property projects and urban-village renewal targeting mainly bigger cities, among other social needs.
Local and regional governments (LRGs) could hit two birds with one stone--meet new housing demand and instill confidence in the property sector, while fulfilling their duties for social welfare provision.
Many projects have indeed been held up by more stringent use of direct local-government funding and the announced measures can increase funding utilization.
In its Oct. 12 press conference, an MOF official said RMB2.3 trillion remains unused of the RMB3.9 trillion in already-approved project bond funding; this implies qualified projects remain relatively scarce, and less funding will go to this area.
Apart from the potential issuance for debt swaps, we do not expect local governments to ramp up their launch of new special purpose bonds much from their 2024 level in the next couple of years. Local governments already have very high debt burdens and limited fiscal space against their revenue challenges. More effective utilization of funding will be the priority.
The MOF also announced plans to swap out "hidden debt" at a relatively large scale. How big might that program turn out to be, and what does it mean for local governments?
Ms. Huang, Laura Li (Infrastructure): For the program to have a meaningful impact, we assume the scale of the swap could be a few trillion renminbi--i.e., exceeding the size of other such initiatives in 2023-2024 but smaller than the RMB12 trillion in 2015-2018. This is partly because hidden debt had already halved by 2023. The deadline to get rid of the rest is before 2028 and this burden has been a constraint on local government finances. Hidden debt is the local governments' off-budget borrowing via LGFVs.
The initiative will also improve transparency on local government debt, but could increase the burden under some scenarios. The MOF is not clear on who will fund the swaps. If local governments are to issue debt, they could be saddled with higher deficits and faster debt accumulation should their revenues fail to recover meaningfully. (see "China's Latest Fix For Local Governments Could Turn Out To Be Debt Relief—Or More Burden," published on RatingsDirect on Oct. 16, 2024).
The program also comes with a reiteration of the mandate for LGFVs to become more self-sufficient and commercial-minded; i.e., to cut down on projects with poor returns. This would be a long-term positive. However, beyond hidden debt, these entities will remain responsible for servicing their other debts, which are substantial. We anticipate increasing credit differentiation within the sector over time (see "China Brief: LGFVs Face Credit Differentiation As Transition Deadline Looms," Oct. 17, 2024).
Will infrastructure investment remain a driver for China's economic growth over the next couple of years?
Ms. Li: Yes, but the effect is diminishing. We expect infrastructure spending will stay substantial, to meet national strategies on strengthening the transportation system, energy transition, and disaster prevention and post-disaster reconstruction. That said, approval of new and sizable projects is becoming more centralized (i.e., made by the central government ) and subject to tighter screening for their economic return and strategic priority (see "Spending Sprees Will Subside As China Refines Infrastructure Investment," May 28, 2023).
Across China, authorities have clearly mandated the major developed provinces (and their SOEs) to stabilize the overall investment, while highly indebted regions are to focus on debt risk resolution. Still, some of the central government funding will tilt toward strategic projects in these highly indebted regions to partially compensate the gap. In infrastructure areas where spending is primarily financed by central SOEs or central government funding, growth is likely to stay high (see chart 1).
Chart 1
What more needs to be done in order to sustainably stabilize property sales?
Edward Chan (Real Estate): We believe China's property sales could stabilize toward the second half of 2025 if the government further supports funding conditions for developers and continues to help destock inventories. When inventories gradually reduce, developers won't need to slash prices. In our view, an ongoing decline in home prices has eroded not only the wealth of existing homeowners but also the confidence of prospective homebuyers.
When home prices stabilize, we believe prospective homebuyers could regain confidence and their appetite to buy property would increase. Other recent demand-side policies that help to improve housing affordability include a reduction in mortgage rates and lowering downpayment requirements.
Home prices in higher-tier cities will gradually stabilize first because of lower supply and stronger demand, in our view. On the other hand, home prices in lower-tier cities will face more severe downward pressure given the larger amount of inventory, lack of investment demand, and lower confidence in housing delivery. As such, we believe developers focusing on premium-quality residential products in higher-tier cities will see more resilient sales performance.
Chart 2
Nonetheless, we believe it will take time for the government's policies to filter into supporting the overall property market. At this stage, we estimate national property sales will decline to about RMB8.5 trillion-RMB9 trillion in 2024 and further to RMB8 trillion-RMB8.5 trillion in 2025 (see "China Property Watch: Charting A Path To Stabilization," Oct. 17, 2024).
To help improve choppy funding conditions, the government is taking some other initiatives including fast-tracking the "white-list" scheme to improve deliveries.
Estimating The Size Of Housing Stimulus Isn't An Exact Science
On Oct. 17, 2024, the Ministry of Housing and Urban-Rural Development, Ministry of Finance, Ministry of Natural Resources, the central, and National Financial Regulatory Administration announced new measures to stabilize the property sector. These new measures include supporting the renovation and redevelopment of 1 million urban village and dilapidated housing units. This support would be provided through monetary compensation to residents.
Like other recent measures, this will undoubtedly translate into fresh stimulus, but the exact size is not clear. Here's our back-of-the-envelope calculation on the potential scope:
- About RMB 1 trillion of additional funding could be required to fund the urban village and dilapidated housing renewal program. In our view, the main source of these fundings could come from local governments and banks.
- Our assumptions assume a unit size: 50 square meters (sqm) to 80 sqm and a price tag of about RMB15,000 per square meter--the average for tier-two cities. For reference, the current national average selling price is about RMB9,800/sqm.
- Our calculation assumes tier-two cities will predominate. If the focus of the redevelopment is geared toward higher tier-two cities and tier-one cities, the amount of additional funding could be higher (see an urban village redevelopment case in the Liwan district of Guangzhou, a tier-one city at "China's RMB350 Billion Policy Push May Help Developer Destocking").
Will the stimulus measures spark a strong demand recovery for commodities demand and higher prices? And help to alleviate risks for commodities sectors with over-supply issue?
Annie Ao (Commodities): Not likely. We have seen some price recovery of steel and cement prices in the domestic market on the back of policy announcements. But we see this as trading and sentiment-related. In our view, it's too early to make the call that the industry downward trend has been reversed or that profits can sustainably recover for industries with overcapacity.
Structural demand changes, primarily linked with the property sector, tightened environmental requirements and trade tensions on China's export will continue to cloud the outlook for these industries over the next two to three years. Supply and demand can only be better balanced through both improved end-use demand and supply-side adjustments to reduce production capacity.
Will the stimulus translate into better consumption and an improved retail outlook into 2025?
Aras Poon (Consumer): Probably not. In our view, employment and property recovery are key to improving consumer sentiment. We think the softness in retail spending is more due to low consumer confidence than spending power. Hence, the mortgage rate cut and lower downpayment could increase household disposable income, but that alone won't likely materially lift consumption.
Chart 3
Based on the breadth of consumption-voucher programs, the boost should be temporary and not material. Over the "golden week" holidays in early October, we believe this partly supported consumer traffic for retailers, restaurants, and hotels. However, vouchers so far have only been issued in a few localities (such as Shanghai and Sichuan).
In addition, their scale is small. For example, the Shanghai program is worth about RMB500 million. Because the vouchers require consumers to spend money to get benefits, we estimate consumers effectively got discounts of 15%-25% on purchases made with them. This implies a sales amount of about RMB2.5 billion, compared with Shanghai total retail sales of about RMB137 billion in August 2024.
We expect spending to stay tepid into 2025 when the impact from such spending boosts fade. Among the consumer categories, we see higher downside risk for catering and auto retail. Our forecast for big-ticket new car sales volume is 0%-3% growth annually over 2025-2026, while price competition remains high.
We also see divergence in consumption trends between higher-tier and lower-tier cities. Tier-1 cities are underperforming in retail sales, likely because more consumers have moved from these regions to lower tier cities to lower their living costs. In the first eight months of the year, tier-1 cities on average recorded an about 1% decline in retail sales, versus +3.4% for overall China.
The relocation trend will trigger another wave of penetration into lower-tier cities by consumer firms. Notably, more restaurant chains are working with food delivery in tier-three and tier-four cities for both dine-in booking and promotion, and food delivery. And this will likely squeeze out some of the smaller players and accelerate market consolidation for the fragmented sector.
Securities companies, funds and insurers can access RMB500 billion through a special liquidity facility that effectively allows them to swap out risk-free bonds to buy stocks. How might this effect liquidity and capital for the sector?
Xi Cheng (Financial services): Some 17 securities companies have already been approved for the program, which means more liquidity for incremental stock investments at a time when market volatility has been rising. We could see pressure on the capitalization of participating security companies, depending on their aggressiveness. Equity exposure typically carries high market risk. This program requires firms to take positions on equity exposures, with a maximum hedge ratio of 10%.
At the sector level RMB500 billion is not a significant amount. It is only about 4% of the sector's total assets as of June 2024. However, these funding would be directed towards equity investments and potentially increase volatility of the sector capitalization.
Margin loans and other assets related to clients' trading needs would also grow if market sentiment stays hot. This would create business opportunities for securities companies, and at the same time expand balance sheets and expose them to additional credit risk.
The swap is only marginally beneficial to liquidity, because it is essentially a tool to facilitate securities firms to increase their equity exposure instead of a tool to provide emergency liquidity to securities firms. Top Chinese securities companies generally have adequate liquidity management, sizable unused bank facilities and good access to capital market for raising funds.
For more details, see "Brokerage Brief: China's New Swap Program Will Likely Squeeze Capital Ratios," published earlier Oct. 24, 2024.
How will easing of home-mortgage loan rates and policy rate cuts affect bank profitability?
Ming Tan (Banks): It will add some pressure. We estimate the latest average 50 basis point (bps) cut in mortgage loans, together with the 25 bps cut to loan prime rates on Oct. 21, 2024, will reduce net interest margins (NIM) by about 20 bps on a static basis. This will contribute to Chinese lenders' returns on assets reducing by about 14 bps (see "Your Three Minutes In China Banks: Stimulus To Squeeze Interest Margins ," Sept. 24, 2024).
We expect the effect on gross interest income would be greater on state-owned megabanks (the country's six largest) than smaller players because of their higher proportion of mortgages in their loan portfolio. The final impact could be reduced after netting off lower bank funding costs. For example, the Chinese megabanks cut deposit rates by up to 25 bps on Oct. 18, 2024.
On the other hand, the smaller regional banks might not be able to notably lower funding costs due to weaker deposit franchises.
Plans for capital increase in the six state-owned megabanks could also alleviate pressure on their capitalization from lower profitability, enabling them to play a key role in supporting the economy, and close the gap on total loss-absorbing capital requirements.
Will the stimulus and related measures have any significant implications on banks' loan growth and asset quality?
Phyllis Liu (Banks) and Mr. Tan: The impact on loan growth and asset quality in general will depend on whether these programs boost economic growth. Expansion of relaxed loans renewal coverage could cloud transparency for reported nonperforming loans. But it has a limited impact on our broader nonperforming asset (NPA) assessment because this already captures unclassified problem loans.
In our base case, we forecast loan growth of about 9% annually over 2024-2026, versus 8.1% year on year in the first nine months of 2024. We think the stimulus could boost loan growth toward our base-case forecast.
The NPA ratio will be 5.5%-5.9% over 2024-2026; the ratio is our broader measure of asset quality that includes nonperforming and special-mention loans and our estimates of other unclassified problem loans. The stimulus could reduce the risk of higher NPA formation over this period if economic growth is supported. But pockets of risk could accumulate from the extension of forbearance policies toward weak borrowers such as property developers and micro and small enterprises (MSEs).
Authorities announced that more MSEs loans and operating loans to mid-sized enterprises maturing before September 2027 may be renewed upon maturity without principal repayment. This measure was available only to selective MSEs previously. Loan classification will not be downgraded in the process of such loan renewals.
Related Research
- Economic Outlook Asia-Pacific Q4 2024: Central Banks To Remain Cautious Despite U.S. Rate Relief, Sept. 24, 2024
- China's bond market reforms key to growing with less debt, June 2024
- Credit FAQ: What Are The Credit Implications Of China's Various Programs To Support Growth?, March 28, 2024
Sovereign
- China's Latest Fix For Local Governments Could Turn Out To Be Debt Relief—Or More Burden, Oct. 16, 2024
- China Ratings Affirmed At 'A+/A-1'; Outlook Stable, June 27, 2024
- Credit FAQ: Policy Implications Of China's 2024 "Two Sessions", March 18, 2024
Property
- China Property Watch: Charting A Path To Stabilization, Oct. 18, 2024
Local Government- And Infrastructure-Related
- Chinese Local Governments Brief: The Search For Alternative Revenues Won't Be Easy, Oct. 9, 2024
- Your Three Minutes In China's LGFV Debt Resolution: Buying Time Is Buying Bad Habits, Sept. 5, 2024
- Is It Working? China's LGFV Debt De-Risk Program One Year On, July 25, 2024
- China's Local Governments: Capacity To Support SOEs Will Be Tighter For Longer, July 8, 2024
- China LGFVs' Bigger Housing Role: Risk Control Matters, March 27, 2024
- Credit FAQ: Policy Implications Of China's 2024 "Two Sessions", March 18, 2024
Banks and Other Financials
- Brokerage Brief: China's New Swap Program Will Likely Squeeze Capital Ratios, Oct. 24, 2024
- Your Three Minutes In China Banks: Stimulus To Squeeze Interest Margins , Sept. 24, 2024
Consumer Goods
Commodities
- Trade Tensions Won't Tarnish China Steel Exports, Oct. 15, 2024
- China Commodities Watch: Trade Tensions Add To The Pain, June 2, 2024
- China Commodities Watch: Upstream Will Hold Up, Downstream Will Suffer, Jan 2024
This report does not constitute a rating action.
| Primary Credit Analysts: | Ryan Tsang, CFA, Hong Kong + 852 2533 3532; ryan.tsang@spglobal.com |
| KimEng Tan, Singapore + 65 6239 6350; kimeng.tan@spglobal.com | |
| Rain Yin, Singapore + (65) 6239 6342; rain.yin@spglobal.com | |
| Edward Chan, CFA, FRM, Hong Kong + 852 2533 3539; edward.chan@spglobal.com | |
| Wenyin Huang, Singapore +65 6216 1052; Wenyin.Huang@spglobal.com | |
| Laura C Li, CFA, Hong Kong + 852 2533 3583; laura.li@spglobal.com | |
| Ming Tan, CFA, Singapore + 65 6216 1095; ming.tan@spglobal.com | |
| Phyllis Liu, CFA, FRM, Hong Kong +852 2532 8036; phyllis.liu@spglobal.com | |
| Annie Ao, Hong Kong +852 2533-3557; annie.ao@spglobal.com | |
| Aras Poon, Hong Kong (852) 2532-8069; aras.poon@spglobal.com | |
| Xi Cheng, Shanghai + 852 2533 3582; xi.cheng@spglobal.com | |
| Asia-Pacific Chief Economist: | Louis Kuijs, Hong Kong +852 9319 7500; louis.kuijs@spglobal.com |
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