Can China's 10 Trillion Yuan Fiscal Policy Revive the Economy?

By TrendForce

2024-11-18

China's CPI Status
China's PPI Status
The Chinese Government Passes a 10 Trillion Yuan Fiscal Policy

China has yet to shake off the risk of deflation, according to data released by the National Bureau of Statistics on November 9.

China's CPI Status

China's Consumer Price Index (CPI) rose by 0.3% year-on-year in October, marking a 0.1 percentage point decline from the previous month. On a month-on-month basis, CPI decreased by 0.3%, reflecting a similar 0.3 percentage point drop.

China's PPI Status

On the China's Producer Price Index (PPI) side, China's PPI contracted by 2.9% year-on-year in October, with a marginal decline of 0.1 percentage points from the previous month. The month-on-month figure showed a decline of 0.1%, albeit an improvement of 0.5 percentage points.

The Chinese Government Passes a 10 Trillion Yuan Fiscal Policy

A day before the data release, China’s National People's Congress Standing Committee approved a fiscal package totaling approximately 10 trillion yuan. This package aims to raise the annual ceiling for special local government bonds by 2 trillion yuan over the next three years to replace implicit local government debts.

Additionally, 800 billion yuan per year over the next five years will be allocated to addressing these hidden debts through special bond issuance.

However, these measures primarily address debts accumulated through Local Government Financing Vehicles (LGFVs), which local governments have used to fund infrastructure projects and meet central GDP growth targets. By not appearing on local government balance sheets, these debts have enabled governments to bypass borrowing limits, leading to a massive buildup of hidden liabilities.

LGFV bonds are frequently repackaged by banks as high-yield wealth management products sold to domestic investors. Despite the low or even negligible economic returns of many of these projects, investors continue to participate, believing that the central government will ultimately back these debts. This broad participation, often with disregard for moral hazard, has created a scenario likened to a "Ponzi scheme."

The impact is clear, the continued downturn in China’s real estate market is pushing the country toward a balance sheet recession, with private consumption and investment constrained by the burden of significant private sector debt repayment. While the government is aware of these challenges, its approach has primarily involved "rolling over old debt with new debt," stalling any substantial economic recovery and hindering effective capital allocation.

2024-11-18

3 Analysis of Why Trump’s Victory is a Nightmare for Europe?

As the U.S. presidential election comes to a close, it is all but confirmed that a wave of Republican dominance led by Trump is imminent, driving global capital to flow heavily into the U.S. capital markets to celebrate the election's outcome. However, Trump's victory appears to be a nightmare for Europe. Several ECB officials publicly stated before and after the U.S. presidential election that Trump's win could deliver further blows to both global and European economies. So, what impact could Trump's victory have on Europe? Tariffs First and foremost, the ECB is deeply concerned about Trump's trade policies. During the trade war, economic growth in the eurozone suffered a significant decline. Although Trump may not impose tariffs as high as 60% like those on China, Europe still faces the potential risk of a 10-20% tariff increase. Read more at Datatrack According to 2023 data from Eurostat, the United States is the EU's largest export partner, with exports totaling over €500 billion, accounting for roughly 20% of the EU's total exports. Among these, machinery and automotive exports are particularly vulnerable, with a combined value exceeding €200 billion, while automotive exports alone amount to approximately €40 billion. Over half of these exports come from Germany. (Source: Eurostat) For Germany, which continues to struggle with a manufacturing downturn, Trump's tariff policies could further restrict the development of its automotive sector and exacerbate economic weakness across the eurozone. According to Goldman Sachs, every 10% increase in tariffs could reduce the eurozone's GDP growth by 1%. Defense Spending Beyond trade policy, Trump's foreign policy stance may increase pressure on European countries to boost defense spending. In light of the ongoing Russia-Ukraine conflict, both the U.S. and Europe have been providing military aid to Ukraine. Trump has repeatedly criticized NATO member states for failing to meet the 2% GDP threshold for defense spending and has threatened to withdraw from NATO to pressure member states to increase their defense budgets. (Source: NATO) While increased defense spending may contribute to GDP growth in European countries, the economic multiplier effect of military expenditures is typically lower, limiting its impact on broader economic activity. Moreover, rising defense budgets could worsen fiscal deficits, elevate long-term bond yields, increase borrowing costs, and dampen economic growth. ECB Monetary Policy These factors add to the already fragile economic outlook in Europe, potentially prompting the ECB to adopt larger or faster rate cuts in 2025. This expectation has led to increased market bets on a weaker euro surrounding the presidential election. As of now, the EUR has depreciated from around 1.09 against the USD on November 5 to 1.06. Read more at Datatrack ▶ Read More Trump Policy Quick Guide: How Will It Impact the U.S. Economy? Why Trump Vows to Enact New Tariffs on China, Canada, and Mexico

2024-11-19

US Credit Card Debt Delinquency Rate Hits Subprime Crisis Level!

The U.S. credit card debt reached a record high of $1.17 trillion in the third quarter of 2024, with the serious delinquency rate climbing further to 11.1%, according to data from the Federal Reserve Bank of New York. This level significantly surpasses the 9.98% peak witnessed during the pandemic and is approaching the figures recorded during the 2008 subprime mortgage crisis. Does this imply a weakening in U.S. consumer spending momentum or signal that economic deterioration may already be underway? (Source: Federal Reserve Bank of New York, TrendForce) Over the past few years, the post-pandemic reopening released a surge in global demand, which supply chains struggled to accommodate, resulting in soaring prices. The U.S. Consumer Price Index (CPI) experienced a historic peak not seen in over four decades. In response, the Federal Reserve began raising interest rates in March 2022 and initiated quantitative tightening a month and a half later to further restrict liquidity in financial markets and prevent economic overheating. As of today, while inflation growth in the U.S. has almost returned to the Federal Reserve's target range, the average price level remains 20-40% higher than pre-pandemic levels. This has led to worsening financial conditions, diminished consumer confidence, and greater financial strain on many American households in recent years. While credit card debt has reached a record high, it still represents a relatively small portion of total U.S. household debt. According to data from the Federal Reserve Bank of New York, credit card loans account for only 6-9% of total household liabilities, with the largest share coming from mortgage debt, which comprises approximately 68-73%. (Source: Federal Reserve Bank of New York, TrendForce) This implies that a significant economic slowdown or downturn is more likely to occur in scenarios where real estate prices experience a sharp decline or consumers are unable to service their mortgage debt, potentially triggering what is known as a "balance sheet recession." Historical data shows that during the U.S. subprime crisis, the serious delinquency rate for credit card debt rose to 13.7%, roughly two percentage points higher than the current 11.3% level. However, at that time, the bursting of the housing bubble caused widespread mortgage defaults, with the mortgage delinquency rate soaring to 8.9%. Currently, the serious delinquency rate for mortgages remains at a historically low 0.7%. This stability is largely attributable to the fact that nearly 90% of U.S. mortgages are on fixed rates, allowing many homeowners to lock in low rates from the pandemic period, shielding them from the recent rise in interest rates. (Source: Federal Reserve Bank of New York, TrendForce) Moreover, data on the credit scores of mortgage holders indicates that average scores exceed 750, reflecting significantly healthier financial and credit conditions than those observed before the financial crisis. (Source: Federal Reserve Bank of New York, TrendForce) In conclusion, we believe the risk of a broad economic downturn is limited. While credit card delinquency rates have reached historic highs, their impact on overall household debt is relatively minor. Rising credit card delinquencies more likely reflect the difficulties faced by lower-income or lower-credit-score populations in servicing debts amid elevated price levels. The Federal Reserve's recent research also points out that a significant portion of current retail sales growth is driven by higher-income groups. Looking ahead, as the Fed continues to cut rates, credit card interest rates (currently exceeding 20%) and delinquency rates are expected to decline, potentially boosting consumer demand.

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