Reuters reported today that China’s leadership is planning CNY 3 trillion in issuance of central government special bonds next year (link HERE). Below are our thoughts on how to put this report into macro context. The takeaway is that if the report is accurate, the increase in support for growth will be modest, especially relative to headwinds from potential US tariffs and weak demand within China.
Note that Beijing will only reveal the size and details of the fiscal package at the National People’s Congress in March, along with other targets such as for real GDP growth. The Reuters piece is the first of many articles to come in the next two months that speculate on these plans. You can find our overall expectations for 2025, based on the Dec. 12 Central Economic Work Conference, HERE.
Less fiscal stimulus than meets the eye
While Reuters and Bloomberg note this CNY 3 trillion would be a “record” issuance, it would only represent a modest increase in stimulus:
- Subtract bank recapitalization. The Reuters report notes that of the CNY 3 trillion, CNY 1 trillion would go to recapitalizing the largest state banks. This is not fiscal stimulus in a direct sense though could help support credit growth (see further below).
- Only a small increase over 2024 bond proceeds. The resulting CNY 2 trillion in funding for fiscal stimulus is consistent with earlier media reports and is what we anticipated in our basecase for fiscal stimulus in 2025, published in early November (link HERE). This amount represents a small increase (0.5 trillion, or 0.5% of GDP) above this year. While China’s central government only issued CNY 1 trillion in special bonds this year, it also had access to around 0.5 trillion in proceeds of special bonds issued in late 2023 and rolled over this year, for a total of CNY 1.5 trillion.
- Actual spending will lag bond issuance, especially for construction activities. MOF recently reported that only slightly more than 50% of last year’s CNY 1 trillion special bond had been spent by October 2024. Such delays will continue into 2025, another reason that actual spending on the ground will be less than the headline numbers suggest. All in all, risks are tilted to the downside in terms of actual fiscal performance next year relative to market expectations.
Not a powerful boost to consumption
The type of fiscal spending also matters: support for consumption will do more to boost growth, and especially to reduce deflationary pressure, than investment spending. In this respect, the Reuters report is consistent with our expectations of only a moderate shift towards consumption spending:
- Reuters indicates that CNY 1.3 trillion would go to funding an expanded version of China’s durable goods trade-in program as well as strategically important infrastructure projects. The trade-in program introduced this year provided subsidies for consumers to buy new autos and appliances and for firms to upgrade industrial equipment.
- Given the other spending areas outlined, it sounds as though the funding for the consumer trade-in program would at most be around double the amount this year (CNY 300 billion). That may not be enough to sustain the recent pace: auto appliance sales have only picked up in the four months starting in August. To match that intensify over the course of the full year in 2025, it may thus take triple the amount of 2024 funding.
- Even with the recent results of the trade-in program, overall retail sales have still been very weak due to broader macro headwinds, especially weak job and income growth. In short, this scale and type of stimulus is unlikely to produce a major consumption rebound, which would require a major fiscal package to boost job creation and/or spending that directly supports household income.
- According to Reuters, the remaining CNY 0.7-1 trillion in the bond package would fund investments in advanced manufacturing and related tech (“new quality productive forces”). Such spending will help advance Xi’s industrial policy priorities but have a low multiplier in terms of boosting growth.
Bottom line for growth
Separate from the Reuters piece, media reports suggest that Beijing is providing local governments with early access to their 2025 bond quotas (which are still undisclosed). Unless the amount of quota significantly exceeds last year, this move is routine. Local government spending will likely pick up starting in mid-February, after the Lunar New Year holiday, providing some support for economic activity in March and into Q2.
For 2025, the bottom line is that the fiscal plan above, combined with our expectation of an increase in official budget deficit to 4% in 2025 (from 3% this year), would serve to stabilize growth at around 4.5% (from around 4.8% this year) in the face of US tariffs. It would not be a sufficiently strong impulse to domestic demand to promote a strong recovery or to break out of deflationary pressures. If Beijing truly wants to hit a 5% GDP growth target next year – as many domestic analysts expect – it will probably require more fiscal firepower than implied by Reuters.
The other key aspect of the stimulus program next year is credit stimulus. Recapitalization of the state banks through bond issuance is a necessary but not sufficient condition to boost credit growth in 2025. It will also require either major cuts to China’s lending rates (which may complicate exchange rate stability), or relaxation by the leadership of the constraints on borrowing by local government financing vehicles (LGFVs). Based on current policy signals, neither seems like a high probability. We noted in our CEWC report that Beijing’s strategy for local government debt is shifting from controlling growth in spending to stimulating growth and countering deflation, but that this is a gradual transition that will play out over the medium term.
