Stop me if you’ve heard this before: China has big stimulus plans.
“Fool me once,” I know. But Beijing’s serious about things this time. CNY3 trillion worth of serious, according to sources who spoke to Reuters about a plan to issue a record amount of special bonds in 2025, with the proceeds earmarked for four programs, two “major” and two “new.”
One of the “new” programs aims to boost household durable goods purchases through incentives. The other’s a subsidy scheme designed to encourage businesses to upgrade their equipment. The “major” initiatives will channel funding to infrastructure, agriculture and, of course, national security.
There was some indication that as much as a third of the total funds raised across the programs would go towards building out China’s advanced manufacturing capacity and other areas Xi considers to be existential imperatives, like semiconductors (AI) and EVs.
A smattering of analyst color on Tuesday suggested the CNY3 trillion figure was larger than expected and may be enough to allay some market fears even if it ultimately falls short of what’s necessary to put a floor under an economy still struggling under a prolonged property crisis and the thumb of a dictator whose domestic economic policies can’t get out of their own way.
Recent data was inauspicious to put it mildly. The credit impulse in November was moribund, retail sales were a big disappointment and exports may be undercut in 2025 once the tariff front-loading impulse abates and new levies are enacted by the US and, very likely, other countries too.
So far, piecemeal stimulus, much of which came in the form of easier money and liquidity from the PBoC, has accomplished little. China’s benchmark bond yields hit another record low this week, before bouncing a few basis points on Tuesday when Reuters tipped the headline special bond issuance target.
As the figure plainly shows, deflation bets are entrenched, and if Beijing’s not careful, the deflation mindset will be too.
The math suggests the planned special bond issuance for 2025 would equate to more than 2.5% of GDP, and Beijing’s already expected to run a wider budget deficit in the new year, a bid to play the so-called “spender of last resort” role. That’s what China needs from the government. A lender of last resort isn’t much use if there’s no demand for credit.
As a quick aside: The special bonds wouldn’t go into the official deficit calculation. China considers the special borrowing to be separate and distinct, and therefore generally excludes it from the raft of headline macro targets the Party releases each year.
As ever, color me skeptical about the likely efficacy of this push. It (still) doesn’t feel like the Party’s paying enough attention to households and consumption. Notwithstanding a lot of lip service in readouts from recent high-level meetings, it’s pretty obvious that Xi’s priorities center mostly around various manifestations of national security, not promoting consumption which he anyway isn’t fond of, at least to the extent it can be described as “conspicuous” or “hedonistic.”
Who will buy these bonds?
Chinese govt bonds are yielding 1%, there is big demand.
I think China tactically should do the minimum now and reserve shock/awe for Trump dealings.
I also think Chinese consumerism is well down on Xi’s priority list. He is, my view, an old school command economy guy, on a mission to build China into the world’s technological, economic, military, political dominatrix – basically, to be the US circa 1960. Consumer stimulus that doesn’t go to semiconductors, biotech, missiles, nuclear and renewable energy, etc is something he’ll do very reluctantly. Stimulate purchases of durables and EVs, well ok. Fast fashion, clubbing, luxury goods, forget it.
Xi will be firmly in power when Trump leaves office, his debt sells for 1% vs 10Y UST nearing 5%, he can repress dissent far better, and Taiwan is his “Trump card”. Extend China’s customs and trade zone a mere 150 miles from its shores, shut down or tariff imports/exports to the island – think Houthi-on-steroids – and Trump will be on his knees for a deal, with his tech-bros screaming along.
https://www.wsj.com/world/china/china-xi-debt-economic-plan-13aaeec1
By moving the production of ALL of their essential logic chip production to a foreign company in Taiwan, Apple followed by AMD, QCOM, NVDA etc presented the PRC with a priceless negotiating chip to use against the US. For some reason, Trump and a few purists seem anxious to water down the Chips Act which is a belated effort effort to reshore the production of a percentage of these essential chips. Why?
Nor is Taiwan itself very helpful on this. Many in their government cling to the notion that by limiting efforts by TSMC to produce cutting edge chips in the US and EU they are preserving their “Silicon Shield” which guarantees that the US, EU and Japan will protect them from any PRC aggression. You might think that they’d wake up to the new reality, but recently TSMC announced that the next generation 2nm chips will be start to be made on the island in late 2025. The technology will not be available from the new Arizona fabs until 2029.
As JL alludes to, the PRC does NOT have to invade Taiwan to get their way. A naval and air blockade is an “easier” option as is destroying the two LNG terminals on the island which supply the natgas which powers around half of the electricity production on the island.
We can thank the US private sector for this. But then again, capitalism is not patriotic when maximizing shareholder returns are the only legitimate goal in our current system. I wonder if DJT’s new tilt towards a populist/fascist model will change the landscape? An early tell may be how he Elon and Peter handle the Chips Act.
Thank you and may Santa remember to pay you all a visit. Don’t forget to open your chimney flues tonight!