The question of why China has been cautious about large-scale fiscal stimulus has been a focal point for market bears. Several factors may explain this restraint:
1) High Savings Rate Among Consumers: Chinese consumers currently exhibit a high savings rate. Any cash handouts or direct fiscal measures may likely be used to pay down mortgage debt, which does not directly contribute to GDP figures, rather than increasing consumer spending. Given this entrenched savings behavior, the Chinese government may be concerned that large-scale fiscal stimulus might not translate into significant GDP growth.
2) Uncertainty Around the U.S. Election: The upcoming U.S. election introduces a period of uncertainty for China. The Chinese government may prefer to reserve its fiscal tools, waiting to see who will assume the presidency. The outcome could affect tariffs and trade relations, requiring different policy responses to reinvigorate the Chinese economy.
3) Sluggish Pace of Budget Spending: Despite a large allocation for the 2024 budget, actual government spending has been slow. There is still excess liquidity from previous budgets that remains untapped. Therefore, issuing new long-term Chinese bonds to fund additional expenditure may be premature if the momentum of existing spending hasn’t been fully realized.
Ultimately, we can see the Chinese government’s determination to shore up the sluggish growth and meet its target.
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