China's Planned Stimulus Package: Balance Instead of Growth Boost

China is pursuing a more strategic approach with its latest fiscal policy package to stabilize its economy. The focus is on repairing the strained balance sheets of real estate and local governments, rather than providing an immediate growth impulse as hoped by the markets and alleviating deflationary pressure. The surprisingly extensive monetary easing last month fueled speculation about an equally significant fiscal counterpart to immediately stimulate the stagnant economy. However, Reuters recently reported that China is considering approving a debt release of more than 10 trillion yuan (approximately 1.4 trillion USD) next week. About 6 trillion yuan are primarily intended to reduce the off-balance-sheet debts of municipalities. The remaining 4 trillion yuan are earmarked for repurchasing idle land from financially distressed developers and reducing the immense inventory of unsold apartments. This tiered approach marks a departure from China's previous comprehensive strategies for promoting growth. It brings back memories of 2008 when China invested heavily in infrastructure projects to address the global financial crisis. Experts like Christopher Beddor from Gavekal Dragonomics emphasize that the primary goal of these measures is the stabilization of balance sheets rather than an immediate increase in GDP growth. While this might alleviate some burdens, a direct increase in spending is not guaranteed. Against the backdrop of remnants from earlier stimulus packages, questions arise about the sustainability of these measures' impact on short- and long-term growth. This uncertainty is also reflected in the markets, as Chinese stocks recorded a decline of about 0.5%, which also affected other Asian markets. Despite the skepticism, Zong Liang from the Bank of China reminds us that a program accounting for over 8% of the GDP of the world's second-largest economy should not be underestimated. It is not just about the size, but about the restored stability. Local governments are facing challenges due to high debt and declining revenues, leading to cuts in salaries and expenditures. Real estate developers are also struggling to resume work on unfinished projects, impacting jobs and income.