Dec 17, 2024, 9:08 AM ETInterview

Will China’s policy stimulus be enough?

China's 2023 GDP growth reached only 5.2% (following 3% in 2022), representing a significant surprise disappointment despite post-reopening expectations for a rebound in services.
In 2024, domestic demand continued to weaken, particularly in the middle of the year, even as exports performed unexpectedly strongly.
GDP growth decelerated quarter-on-quarter in 2024, prompting policymakers to announce stimulus measures at the end of September after tolerating more economic pain than previously anticipated.

The National People's Congress Standing Committee approved a 10 trillion RMB local government debt swap plan in early November, described as the most critical easing measure.
Hui Shan (Goldman Sachs) estimates the swap is intended to prevent local governments from prioritizing debt repayment over essential services like schools and hospitals, effectively covering the estimated 2 trillion RMB fiscal shortfall for the year.
Michael Pettis argues the debt swap is largely ineffective as a long-term solution, characterizing it as merely moving debt from off-balance-sheet pockets to on-balance-sheet ones without changing fundamental balances.
While the swap lowers debt servicing costs for local governments, Pettis notes the savings (estimated at $50–$70 billion annually) are negligible relative to the $123 trillion economy and essentially transfer revenue to the banking system, requiring further bank recapitalization.
Total local government financing vehicle interest-bearing liabilities exceed 60 trillion RMB, making the current annual quota of over 2 trillion RMB appear small in the grand scheme of deleveraging.

Policymakers acknowledge that traditional drivers like property and infrastructure investment are no longer viable levers for growth and are shifting focus toward consumption.
The government has introduced consumer trade-in programs (similar to U.S. "cash for clunkers") offering subsidies for exchanging old goods for new ones to stimulate domestic demand.
Michael Pettis critiques current supply-side subsidies aimed at boosting manufacturing and hiring as counterproductive, arguing that China needs consumption relative to production, not increased production.
Strategies to stabilize real estate prices and boost stock market wealth effects are viewed with skepticism by experts due to a declining working population, excess housing inventory in many regions, and a small stock market float held by wealthy speculators.

Analysts project that even a scenario where all Chinese exports to the U.S. cease due to high tariffs would impact roughly 3% of China's GDP (approx. 4 trillion RMB), a loss deemed manageable given China's central bank capabilities.
The primary risk from the re-election of Donald Trump is identified not as the direct tariff impact, but as the "uncertainty effect" that halts investment due to unpredictability.
The U.S. and China together account for nearly 50% of global manufacturing; if both nations attempt to increase their manufacturing-to-GDP shares simultaneously, the rest of the world faces an arithmetic impossibility of reducing its manufacturing share, prompting protective trade policies in Europe and hurting developing nations.

Short-term expectations point to an expansion of fiscal support greater than current levels, with real demand-side stimulus likely to materialize in the first quarter of the year.
Michael Pettis characterizes the current fiscal expansion as a temporary solution, asserting that sustainable rebalancing requires the difficult structural task of increasing the household sector's share of GDP while reducing the shares retained by governments and businesses.
The conversation concludes that while the direction of travel toward consumption-led growth is clear, the speed and ultimate success of these transitions remain highly uncertain.
Experts suggest the central government is utilizing the debt crisis to centralize power, potentially forcing local governments to liquidate assets to clear losses rather than allowing the central balance sheet to absorb the burden.