Beijing directs fiscal firepower at itself

Big spender. It's been a busy week for Chinese officials. The government plans to issue special sovereign bonds worth about 2 trillion yuan ($284.4 billion), Reuters reported on Thursday, citing sources with knowledge of the matter. The same day, the country's top leaders pledged to deploy "necessary fiscal spending" to meet this year's economic growth target, following the central bank's sweeping rate cuts and other easing measures a few days ago. Yet none of this will be enough to alter the $18 trillion economy's long-term prospects.

The special government debt would equal to just 1.4% of last year's GDP - not quite the "whatever it takes" big-bang approach many economists and investors had been hoping for. To compare, when Beijing unleashed a 4 trillion yuan stimulus programme back in 2009, that was roughly 12% of the economy.

Moreover, it's unclear how much of the proceeds will actually end up in consumers' pockets. As part of the package, 1 trillion yuan will be used to boost domestic spending, according to Reuters, while the other half will be to help local governments tackle debt problems. Authorities are also considering issuing an additional 1 trillion yuan of sovereign bonds to recapitalise its biggest banks for the first time since 2008, Bloomberg reported earlier this week, citing sources.

Details are scarce, but it appears that the bulk of Beijing's fiscal firepower will be aimed at itself - mainly bailing out local governments and bolstering state-owned banks. And even the initiatives aimed at consumers look disappointing: the Ministry of Finance will target expanding an existing goods trade-in programme for households and businesses, per Reuters, and hand out a monthly allowance of about 800 yuan per child to households with two or more kids.

All in all, the 2 trillion yuan package reported by Reuters could increase GDP by 0.4% over the course of next year, reckons Capital Economics. Anything more substantial and long-lasting, though, will require not only more fiscal spending, but a redirection of the funds to tackle structural issues. Analysts at Morgan Stanley estimate it will take 10 trillion yuan, with most of the funds going toward pensions and healthcare, over the next two years to meaningfully lift growth. This week's policy salvos have sent stocks soaring, as Beijing finally sends out the right message that it will spend more to boost economic growth. But following through is another matter.

Context News

China plans to issue special sovereign bonds worth about 2 trillion yuan this year as part of a fresh fiscal stimulus, Reuters reported on Sept. 26, citing two sources with knowledge of the matter. Separately, the Politburo of the Communist Party of China held a meeting on Sept. 26. According to a readout published by Xinhua news agency, the top officials stressed the need to “issue and make good use of ultra-long special treasury bonds”. The ruling body has also called for measures to “stop the decline of the property market” as well as “significant rate cut”.