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Can China’s 10 Trillion Yuan Fiscal Policy Revive the Economy?
China has yet to shake off the risk of deflation, according to data released by the National Bureau of Statistics on November 9.
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.
Breaking down the components, food prices—a key driver of CPI growth—slowed to a 2.9% year-on-year increase, representing a 0.4 percentage point deceleration. Non-food prices, however, recorded a deeper year-on-year decline of 0.3%, mainly due to falling international crude oil prices.
Service-related prices edged up by 0.2 percentage points to a 0.4% annual growth rate, driven by a temporary boost in travel costs during the National Day holiday, but still registered a 0.4% year-on-year decline.
Excluding food and energy, core CPI rose by just 0.2%, a modest increase of 0.1 percentage points from the previous period.
PPI Status
On the 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 breakdown indicates that producer prices for means of production remained down 3.3% year-on-year, though month-on-month growth of 0.1% suggests short-term support from recent stimulus measures targeting construction-related industries.
Conversely, prices for consumer goods saw a broader decline, with a year-on-year decrease widening by 0.3 percentage points to 1.6%.
Among durable goods, the decline in automobile factory prices expanded to 3.1%, while prices for computers, communications, and electronic products contracted by 2.9%.
Overall, the impact of China’s September monetary easing policies appears limited, as consumer confidence remains weak and spending sluggish. This continued weakness has forced businesses to further lower prices, compressing margins and sustaining deflationary pressures in the economy.
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.