China's debt pressure rises Financial Times: Space for fiscal stimulus has been limited

The Financial Times reported that the latest research from the Conference Board showed that China’s increasing debt burden has become a constraint on the country’s implementation of new economic stimulus policies. Due to the past reliance on investment-driven growth, debt interest payments have risen rapidly, severely limiting China's fiscal flexibility.

Research shows that debt service expenditures alone are expected to account for 19.2% of the central government's general public budget this year, up from 12% in 2014. The problem is particularly acute at the local government level, where interest payments on debt increased by 16% per year during the same period. Overall, China's central and local government debt interest payments this year are expected to reach 1.4 trillion yuan (the same below, NT$6.7 trillion), higher than 348 billion yuan (approximately NT$1.7 trillion) in 2014.

"Debt repayment has gradually become a major limitation on local fiscal space," said Zhang Yuhan, chief economist at The Conference Board's China Center.

Analysts at Morgan Stanley pointed out that due to its reliance on investment-driven growth in the past, China's debt has increased rapidly. The ratio of public debt to gross domestic product (GDP) is expected to rise to 122% by the end of this year, a 48 percentage point increase from before the outbreak of the Wuhan pneumonia epidemic.

As the five-year property market slump hits household and local government finances, Beijing has promised to introduce more measures to stimulate weak domestic demand. Amid weak retail sales and fixed asset investment, China's second-quarter GDP growth slowed to 4.3%, below the official annual growth target of 4.5% to 5%.

China announced some stimulus measures at the end of September, including providing subsidies for mortgage interest and reducing the interest rate of a financing mechanism. China's tax authorities are also trying to collect taxes on wealthy people's overseas earnings to plug fiscal gaps. But several analysts question the effectiveness of these stimulus measures.

Barclays described the measures as helpful but limited in impact. Goldman Sachs estimates that these measures are equivalent to small fiscal subsidies of up to 100 billion yuan (NT$475.6 billion) within five years. Lin Zhenhong, head of real estate research for Asia Pacific and Greater China at UBS, said these measures may not be as good as investors expected.