China to resort to consumer stimulus

More stimulus measures could be announced at a politburo meeting this month or later in the year if growth fails to pick up, economists said. — Bloomberg

CHINA’S use of ultra-long treasury bonds to fund a consumer goods trade-in programme deviates from the usual playbook of boosting investment to support the economy and is fuelling expectations for more stimulus that targets household demand.

The state planning agency said on Thursday that about 150 billion yuan (US$20.7bil) of the one trillion yuan China is raising through special debt issuance this year will subsidise replacements of old appliances, cars, bicycles and other goods.

Equivalent to 0.12% of economic output and 0.3% of 2023’s retail sales, this amount is too tiny to lead to a meaningful rebalancing of the economy towards consumption or guarantee reaching this year’s roughly 5% growth target.

It does, however, show that concerns that consumer sentiment lingers near record lows are prompting authorities to finally test measures long called for by economists that are not from the usual supply-side toolkit.

Special bonds traditionally fund “strategic” infrastructure and security-related investments.

“They are changing the way they use such funds in line with the shifts in the economy,” Hwabao Trust economist Nie Wen said.“This is an important change. The most striking problem facing the economy is weak demand, so expanding domestic demand will become a more significant policy option.”

More stimulus measures could be announced at a politburo meeting this month or later in the year if growth fails to pick up, economists said.

After unshackling the economy from three years of Covid-19 restrictions, Chinese officials had hoped that stimulating the industrial sector would stabilise the job market and lead to higher wages and consumption.

What happened instead was that greater industrial capacity led to price wars and a cost-cutting race that kept wages depressed, fuelling job uncertainty and adding to the pain among consumers caused by the property sector downturn.

China’s economy missed growth forecasts in the second quarter and remained in a deflationary funk, with retail sales and imports significantly underperforming industrial output and exports.

China initiated the consumer trade-in scheme in March, but Beijing previously enrolled cash-strapped local governments to fund it, with unspectacular results. — Bloomberg