China's Fiscal Stimulus Loses Effectiveness as Strategy to Buy Time, S&P Says

China's fiscal stimulus measures are losing their effectiveness and becoming more of a strategy to buy time for industrial and consumption policies, according to Yunbang Xu, a senior analyst at S&P Global Ratings. The analysis found that high debt levels are limiting the amount of fiscal stimulus local governments can undertake, with public debt as a share of GDP ranging from 20% to 140% across different regions.

Despite a GDP growth target of around 5% this year, the diminishing effectiveness of fiscal stimulus is prompting local governments to focus on reducing red tape and improving business environments to support long-term growth and living standards. "Investment has been less effective, with a slowdown in the property sector," Xu noted.

The Chinese government has announced plans to bolster domestic demand through subsidies and other incentives for upgrading equipment and switching consumer goods. However, S&P's analysis reveals that fiscal stimulus has been more effective in richer cities compared to lower-income regions. Higher-income cities are less vulnerable to property market declines, have stronger industrial bases, and their consumption is more resilient during downturns.

Why this matters: China's shifting economic strategy has significant implications for global markets and trade. As the world's second-largest economy grapples with slowing growth and high debt levels, its ability to sustain long-term economic stability will have far-reaching consequences for international investors and businesses.

Looking ahead, S&P expects higher-tech sectors to continue driving China's industrial upgrade and anchoring long-term economic growth. However, overcapacity in some sectors could lead to near-term price pressures. "The report emphasizes the importance of strengthening macroeconomic policies and increasing coordination among various policies to support long-term economic growth," Xu said.

Key Takeaways

• China's fiscal stimulus measures are losing effectiveness, with high debt limiting local stimulus.
• Diminishing stimulus effectiveness prompts focus on reducing red tape and improving business environment.
• Fiscal stimulus more effective in richer cities than lower-income regions due to property, industry, and consumption.
• China's shifting economic strategy has significant implications for global markets and trade.
• S&P expects higher-tech sectors to drive China's industrial upgrade and long-term growth, but overcapacity risks near-term price pressures.