Additional support for consumers and businesses should eventually arrive, not least because stimulus will be necessary to offset another trade war under President Trump. But the focus on de-risking and shoring up balance sheets may continue to disappoint market expectations for big stimulus.
Abrupt policy pivot loses momentum
Markets were shocked in late September by Chinese policymakers suddenly shifting gear, announcing a raft of new support measures, and breaking from a long period of incremental and piecemeal policy easing.
However, while there have been many easing measures announced – spanning monetary policy and real estate – these have started to come more slowly and in somewhat underwhelming size relative to market expectations.
Indeed, while market expectations were not particularly high for the National People's Congress, the prioritization of steps to shore up local government balance sheets, rather than announcing direct fiscal stimulus for households and corporates, was disappointing. This is especially the case given Donald Trump’s presidential win, which is all but certain to unleash another trade war.
No sign of the policy bazooka
The National People’s Congress Standing Committee press conference grabbed news headlines earlier this month, announcing a RMB 10 trillion debt swap.1
The local government debt ceiling is to be raised by RMB 6 trillion by the end of 2026, while a further RMB 4 trillion will be swapped using the special bond quota through to the end of 2028.1
Local governments will still need to find RMB 2 trillion to deal with maturing debt related to shantytown redevelopment in 2029 and beyond, but this is too far in the future to affect current plans and in practice further expansions of local government debt issuance will most likely be condoned.
Finance minister Lan Fo'an said that these steps are expected to cut the stock of “hidden” debts from RMB 14.3 trillion to 2.3 trillion.2 That said, there is disagreement about the scale of off-balance sheet and “hidden” debt.2 The International Monetary Fund estimates that local government financing vehicle debt stands at RMB 66 trillion, suggesting that more “hidden” debt could be found at a later date.3,2
The debt swap is certainly welcome from a financial stability perspective and is unambiguously good for local government finances. Put simply, it swaps one relatively costly form of borrowing for another cheaper form. Indeed, the Ministry of Finance estimates that this should save local governments RMB 600 billion (~0.5% GDP) by reducing interest rate costs over the next five years.4
It is not however what markets were really hoping for.
The economy still faces significant challenges from its beleaguered property sector, a weak nominal growth environment and reticent consumers.
The debt swap reduces the risk of a more austere fiscal backdrop, but direct fiscal support for households and businesses is needed to unlock potential synergies across the policy levers, raising the chances that the economy can overcome multiple headwinds.
The authorities did at least provide some guidance that consumption support measures are still on their way. But markets may need to wait for December’s Politburo meeting or the Central Economic Work Conference for more details.
A Trump 2.0 trade war will lead to more easing …
… But we are downgrading our growth forecasts anyway.
Trump’s re-election suggests that the authorities will be forced to ramp up policy easing.
Noise will likely be high and multiple countries will likely come under pressure due to their high bilateral deficits with the US. But, while threats against other countries are plausibly aimed at extracting concessions – such as increasing European defense spending or reducing the flows of migrants from Latin America – it seems unlikely that China will be able to avoid another trade war.
The Chinese authorities may still opt to reserve policy optionality until US trade policy is revealed in 2025, partly because it is unclear when Trump will turn his attention to China. But tariffs are more a question of when and how high rather than if. For now, we assume that the average bilateral tariff rate will be roughly doubled from 16% to 35–40% (Chart 1).
Chart 1. Tariffs are likely to double
Chinese GDP growth did slow from an average of 6.9% year over year in 2016–2017 to 6.4% in 2018–2019 once the first trade war began, but it is difficult to be sure what role tariffs played.
Shantytown redevelopment was a major driver of growth in 2016–2017 and global trade also picked up notably following a period of weakness in 2015; hence, some moderation was likely. In addition, the start of the authorities’ derisking campaign was a key policy shift that began to weigh on trend growth over 2018–2019.
So, while the authorities allowed the currency to release some of the pressure from tariffs, and policy shifted to a more neutral setting, cyclical and structural drivers outside of the first trade war may have been the largest contributors to China’s 0.5 ppt growth slowdown.
We assume that the authorities will allow a currency depreciation to take some of the strain this time too. Combined with more decisive additional policy easing, this should be enough to absorb much, but not all, of the immediate economic hit from higher tariffs.
Our latest forecasts assume that GDP growth in 2025 and 2026 will be reduced by 0.2 percentage points in each year (4.4% and 4.2%, respectively) as a result of Trump’s tougher trade actions.
Final thoughts
Trump’s win suggests Chinese authorities will ramp up easing in 2025. While trade threats against other countries may be aimed at extracting concessions, such as increasing European defense spending or reducing flows of migrants from Latin America, it’s unlikely that China can avoid another tariff shock. However, additional stimulus and currency depreciation can only offset some, but not all, of the immediate economic hit from higher tariffs. For now, we assume that the average bilateral tariff rate will be roughly doubled from 16% to 35–40%, pushing our growth forecasts down to 4.4% and 4.2% for 2025 and 2026, respectively (-0.2 ppts each). A more aggressive stimulus package could mitigate more of the near-term damage, but a long-run drag will still be hard to avoid.
1 "China approves $1.4 trillion debt package in latest measure to boost flagging economy." CNN Business, November 2024. https://www.cnn.com/2024/11/08/business/china-economy-hidden-debt-intl-hnk/index.html.
2 "China unveils $1.4 trillion local debt package but no direct stimulus." Reuters, November 2024. https://www.reuters.com/world/china/china-unveils-steps-tackle-hidden-debt-local-goverments-2024-11-08/.
3 "Xi Jinping unveils sweeping plans to fix China’s $9 trillion hidden debt crisis." Fortune, July 2024. https://fortune.com/2024/07/21/china-debt-crisis-xi-jinping-plans-fixes-central-local-government-revenue-transfers/.
4 "China approves bill to raise local govt debt ceiling by 6 trillion yuan." Global Times, November 2024. https://www.globaltimes.cn/page/202411/1322698.shtml.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
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