The weekly recap: Chinese leaders’ slow shift toward boosting consumption

I’m starting to sense that a major macro-policy shift is underway in Beijing – but, as with all such adjustments, it will take a while to fully play out.

At least, that’s my take after having had a few days to digest the latest fiscal support package announced by the legislature (NPCSC) on Friday.

The shift: Central officials seem to be inching toward the realization that, to directly boost consumption, households need significant, ongoing fiscal support – not just in the near term but for years to come.

Yes, I know all the arguments that Chinese officials have been promising, for decades, to do more to support consumption and rebalance the economy away from investment and exports, with little to show for it.

But we are now operating under new economic and policy conditions.

• The former dictates that officials must take a fresh approach, while the latter is slowly unlocking the political will to do so.

But before I get into my thinking on this shift, it’s worth taking quick stock of the fiscal announcements the NPCSC and the finance ministry (MoF) made late last week.

The headline: The NPCSC approved RMB 10 trillion of new debt-raising capacity for local governments, to swap off-balance-sheet “hidden debt” for longer-dated, lower-cost, and on-balance-sheet bond issuance.

• The money will be allocated in two tranches – RMB 6 trillion raised over three years and RMB 4 trillion raised over five years.
• So that’s RMB 2.8 trillion per year from 2024 to 2026, and RMB 800 billion per year in 2027-2028.
• So far, we see no difference between the two tranches – as they are both allocated for local government debt swaps – so it’s unclear at this point why authorities broke them out.

Our take: While we got the headline number we wanted, we’re disappointed with the package overall.

• Our primary disappointment is that the funds are not being raised by the central government and transferred to the localities.
• It’s increasingly clear – both to us and seemingly to Beijing – that at some point the central government will have to undertake a local government bailout. But it seems officials aren’t ready for that yet.
• Our second disappointment is that there were not additional funds allocated for outright stimulus measures – whether for the property market, new infrastructure investment, or boosting short-term consumption.
• So we’d characterize this more as a local government debt relief package than true economic stimulus, per se.

At this point, it is clear that senior officials remain focused, first and foremost, on financial stability – and the vulnerabilities stemming from local governments’ inability to service their debt.

• The latest fiscal support package is primarily designed to target those most pressing vulnerabilities.

But rest assured, more direct stimulus is in the works – though it won’t be rolled out until 2025.

On the heels of the NPCSC’s debt swap announcement, Finance Minister Lan Fo’an held a press conference to reveal that more support is coming next year, including:

• Allowing local governments to use special-purpose bonds to buy idle land and unsold housing inventory from developers
• Providing more support for the consumer goods trade-in program

Then on Monday, Caixin published an article citing “an expert close to the central bank” (PBoC) as saying that economic support measures will increasingly focus on consumption.

Specifically, this expert argued that Beijing’s slow build of “incremental” support measures represents a major change in “policy logic” that:

• “Encompasses not only short-term measures to boost demand but also numerous reform and structural adjustment plans…[to balance] both consumption and investment, with a heightened emphasis on consumption”

This language echoes comments by PBoC Governor Pan Gongsheng in mid-October and the argument we recently highlighted from Xi Jinping’s top economic policy advisor, Liu Yuanchun – President of the Shanghai University of Finance and Economics.

• Additionally, an article published on Friday by Luo Zhiheng – chief economist at Yuekai Securities and a participant in Premier Li Qiang’s recent economic symposium – suggests that officials are considering a central bailout of local authorities, possibly by reimbursing them for debt accrued due to central government spending mandates.

To me, this growing chorus of voices suggests that central authorities are slowly coming to terms with the necessity of using the central government’s balance sheet to undertake lasting fixes for local government fiscal positions and the severe, persistent weakness in consumer demand.

• And indeed, authorities have regularly characterized their recent policy rollouts as an incremental – read: ongoing and cumulative – effort to make structural adjustments to the economy.

What’s more, policy advisors are increasingly making the case that addressing China’s weak consumer spending requires structural changes, not just short-term stimulus.

• A range of policy advisors argue that the biggest challenge to consumption stems from the chronic underspending of the urban migrant population, which by some estimates makes up 30% of the urban population.

These calls for structural change are growing louder – and were, to some extent, acknowledged at the Third Plenum – which further suggests that a profound shift in “policy logic” is indeed taking place.

Unfortunately, such major shifts in policy thinking can take years to translate into concrete policy actions.

• But in my view, we are seeing the beginnings of this shift – which is why I fully expect the NPCSC’s recent fiscal support package to be supplemented by an increase in central fiscal resources in 2025 and beyond.

The policy support framework that the central government has employed for the past 40 years would never have allowed for a direct local government bailout or permanently elevated fiscal support for consumers.

• But there is increasingly clear evidence that central officials are slowly realizing both of these moves are now inevitable.

-Andrew Polk, Co-founder, Trivium China

What you missed

Corporates

Geopolitics might already be reshaping overseas investment decisions by Chinese new energy vehicle (NEV) manufacturers.

• On Monday, Reuters reported that the joint venture (JV) between Chinese NEV upstart Leapmotor and European-American auto giant Stellantis has canceled plans to manufacture its second NEV model in Poland – shifting production to two Stellantis factories in central Germany and Slovakia instead.
• If the JV’s decision is confirmed, it would support reports that Beijing has instructed its automakers to shift investments away from EU countries that endorsed tariffs on Chinese NEVs, like Poland, and toward those that opposed them, like Germany and Slovakia.

On Friday, EU authorities announced they had found Temu in violation of consumer protection laws, following an investigation.

• Temu now has one month to respond to the findings and present a rectification plan, or face potentially large fines.
• Temu is also facing ongoing but separate proceedings in the EU relating to violations of the Digital Services Act (DSA).

Tech

On Monday, the China Chamber of Commerce for Import and Export of Machinery and Electronic Products held an export control compliance conference in Beijing.

• Why we care: Two weeks ago, China’s Ministry of Commerce (MofCom) released new export control regulations for dual-use items.
• But the fact that an industry association focused on electronics sponsored this event could be a clue that China intends to restrict the export of a wider body of goods.

On Friday, TSMC informed mainland Chinese chipmakers it is pausing shipments of high-end AI chips for mainland China customers, effective immediately.

• The stoppage does not apply to chips for autos and phones.
• The move comes after a TSMC chip was found inside a processor produced by US-sanctioned Huawei.

On Tuesday, the Washington Post reported that US President-elect Trump is planning on following through with plans to prevent TikTok from being banned in the US.

• During his first administration, Trump tried and failed to ban TikTok and other Chinese apps.
• But in March, Trump hinted that he had changed his mind, saying that TikTok presents necessary competition for Meta.

Econ and finance

In October, credit growth dropped below the minimum rate set by the central bank (PBoC).

• Some context: In March, PBoC Deputy Governor Xuan Changneng said that to achieve China’s economic growth target, total social financing (TSF) growth “should not be less than 8%” this year.
• Outstanding total social financing (TSF) grew 7.8% y/y last month, down from 8.0% in September – as credit demand among firms and households has been persistently weak for months.

On Wednesday, the finance ministry (MoF), tax administration (STA), and housing ministry (MoHURD) jointly announced new tax incentives for real estate transactions.

• Add these tax breaks to Beijing’s steady trickle of recent property sector support.
• Our take: While ultimately unlikely to reverse the sector’s decline, they may help sustain the market’s recent momentum for a little longer.

Business environment

On Tuesday, the transport ministry (MoT) and macro planner (NDRC) issued an action plan aimed at reducing logistics costs and boosting efficiency.

• The plan’s big goal: Reduce logistics costs as a share of GDP from 14.4% in 2023 to 13.5% by 2027.
• Policymakers see boosting more cost-effective rail and water-based cargo transportation as essential to achieving this objective.

Beijing has released a long-awaited action plan to curb soil pollution.

• The plan calls for significant progress in key areas by 2027, including inspecting and rectifying soil pollution risks from 90% of enterprises the environment ministry classifies as “key environmental supervision units.”
• Get smart: Get ready for a massive spike in soil-related inspections between now and 2027 – especially in and around the areas where the soil census identifies problems.

Net zero

After 17 years of deliberation and internal squabbling, China has finally passed a National Energy Law.

• The legislature (NPCSC) approved the long-awaited law on Friday.
• The new law formalizes the state’s existing support for the energy transition, requiring government bodies to: prioritize renewable energy development and promote the gradual replacement of fossil fuels; establish minimum renewable energy consumption quotas; and strengthen the grid’s capacity to integrate renewable energy.

Foreign affairs

On Wednesday, Xi Jinping headed to Peru for a packed trip, including a state visit to Lima, the Asia-Pacific Economic Cooperation (APEC) summit, and face-to-face meetings with several heads of state, including outgoing US President Joe Biden.

• Xi will also inaugurate Chancay Port, a deepwater megaport project in which state-owned COSCO Shipping holds a 60% stake.
• Peru is a case study of China’s growing appeal as an investment and trade partner across Latin America.

In the runup to his Peru trip, Xi Jinping undertook a flurry of diplomacy, meeting with:

• Indonesia’s new president, Prabowo Subianto, on Saturday.
• Italian President Sergio Mattarella, on Friday.
• Malaysia’s Prime Minister Anwar Ibrahim, on Thursday.

US-China

Beijing is planning how to capitalize on anticipated US tariff hikes under a second Trump administration.

• The crux: Chinese officials are reportedly weighing unilateral tariff cuts on imports from non-US trading partners.
• Get smart: This would be a brilliant move – lowering import duties would not only benefit the Chinese economy but would also buy China some global goodwill at a time when US trade policy takes a protectionist turn.

On Monday, China’s market regulator (SAMR) announced it held a working meeting with the US Patent and Trademark Office (USPTO) on fighting counterfeit goods online.

• More than 200 representatives sat down for the discussion, including law enforcement and judicial officials, as well as companies and platforms.
• Get smart: The hope is that this sharing session will dovetail into stronger bilateral efforts to tackle counterfeiting in global e-commerce, but the incoming Trump administration could have a chilling effect on cooperative programs such as this one going forward.

As always, it was a busy week in China.

• Thank goodness Trivium China is here to make sure you don’t miss any of the developments that matter.