In recent times, Nomura Securities' Chief Economist, Richard Koo, who came out with the concept of Japan's "balance sheet recession," has recently discussed the use of large-scale fiscal stimulus to restore China's balance sheet in response to the current sluggish real estate market and slowing economic growth. As China's economic growth gradually slows down, many people are deeply concerned about whether China will repeat the "lost two decades" experienced by Japan. Some also hold a more pessimistic outlook on the country's high macro leverage ratio. Koo's views also reflect the market's call for increased macroeconomic stimulus policies. Under the backdrop of macro policies emphasizing stability and seeking progress, it has drawn market attention and sparked numerous debates.
Setting aside the similarities between the Chinese and Japanese economies, Koo's views resonate with many due to the ongoing concern over the resolution of local government debt issues, which has become a market focus. As local fiscal pressures increase and debt risks accumulate, many have repeatedly suggested that the Chinese central government shoulder the burden of local debt to address the overall economic slowdown and deleveraging at the local level. Koo's view can be seen as aligning with this perspective and has attracted significant attention. Will there be another round of large-scale monetary easing in macro policies in China? Will its central government bear the burden of local debt? These policy questions are not only of great concern to many businesses but also to local governments with heavy debt burdens and economic pressures, who urgently seek answers to overcome the current development bottlenecks in the country.
In the view of ANBOUND researchers, the reason why the market repeatedly resorts to increasing stimulus as a way to address economic growth issues is actually due to the fact that this approach has always been a pattern in China's policies. It involves using infrastructure investment to drive the development of the real estate market and bring incremental growth to the economy and has shown actual effectiveness in past cycles.
The current exacerbation of local government debt risks is mainly due to the sluggish real estate market, which has adversely affected local land finance. This situation has made it difficult for a large amount of debt incurred for urbanization financing to circulate and be repaid. Under such a backdrop, as long as the central government increases leverage and revitalizes the real estate market, both the debt problem and fiscal issue can be resolved. However, considering the long-term trend of China's economy, ANBOUND researchers have previously warned that in a situation where the inherent logic of economic growth and external factors have changed, the local land-based economic development model will also face new adjustments. This implies that the possibility of promoting large-scale stimulus policies domestically is not high for a considerable period. Foreseeably, the country's future macro policies will adopt a more cautious and neutral tone.
On the one hand, against the backdrop of increasing external geopolitical risks and major central banks globally promoting monetary tightening, it is difficult for the Chinese economy to continue driving the expansion of the real estate market through fiscal expansion and monetary injections. In recent years, its central government has repeatedly emphasized "risk prevention", not only in terms of domestic risks but also in terms of safeguarding national security risks. Therefore, having sufficient reserves, as well as preventing capital outflows that cause the burst of the real estate market bubble would be the country's crucial task. On the monetary front, with the high-interest rate differential between China and the United States and the narrowing of the interest spread between deposits and loans in commercial banks, the room for monetary policy is limited. Thus, despite the large-scale stimulus policies playing a role in driving rapid economic growth in the past, under the current conditions and multiple constraints, they are difficult to implement with little room for maneuver.
On the other hand, after multiple rounds of policy stimulus, the overall macro leverage ratio in China has reached a relatively high level. Although the burden on central government finances is not significant, local governments carry a massive debt burden that cannot be entirely supported by the central government. It can only be gradually absorbed through the "time for space" approach. Meanwhile, the growth of local government debt has not been effectively curbed. Even if the central government provides support, it cannot completely prevent local governments from continuing to rely on government financing platforms for borrowing, which hinders the reduction of local government debt. This has become evident in the previous rounds of cleanup efforts. Without an effective mechanism to restrain the scale of debt, there is no way to limit the financing impulses of local governments. This is also the root cause of why the central government has been reluctant to provide complete support for local government debt.
To avoid systemic risks, the central government may implement specific policies for regions facing severe individual debt problems, and central finances may provide relief through transfer payments and other measures to alleviate financial pressures on heavily indebted areas. However, these measures are contingent upon local governments taking substantial steps to address existing debt issues and effectively preventing the accumulation of new debts. By the time the central government intervenes to offer assistance, local governments will likely have already paid a significant price. In the dynamics between the central and local governments, local authorities must carefully consider the serious consequences associated with such interventions.
In fact, China has been actively promoting supply-side reforms in recent years to achieve high-quality development, transform and upgrade the economy, and explore new avenues for growth. As urbanization enters a new phase, the significance of the real estate sector to the economy is undergoing qualitative changes. The future development of the real estate market will naturally gravitate towards normalization, establishing self-sustaining cycles, and its role in the economy and finance will gradually diminish. Although real estate still holds a prominent position in the macro economy, its necessity for driving economic growth is no longer as pronounced as before. Hence, local governments will need to shift their mindset and models of development, facilitate the transformation of financing platforms, and keep pace with the evolving trends in economic development. Failing to do so may leave them in a passive and challenging situation, struggling to reverse the tide.
Final analysis conclusion:
Currently, in response to the sluggish real estate market and the slowdown in economic growth in China, some economists have mentioned the idea and suggestion of using large-scale fiscal stimulus from the central government to revive the balance sheet. This perspective essentially brings China's economy back to the old path of relying on real estate and urbanization to drive economic growth. However, given the significant changes in the current domestic and international situation, the development model of the Chinese economy also needs to undergo transformation. Therefore, relying on fiscal stimulus through loosening monetary policies is no longer feasible or viable.
