What Makes the Current Package of Incremental Policies Different?

By ZHAO Wei, JIA Dongxu and Hou Qiannan

Since late September, China has been intensifying its macroeconomic policies. The financial policy has introduced a new iteration of "three arrows", namely credit, bonds and equity, while fiscal policy has rolled out incremental measures on four aspects. During a meeting of the Political Bureau of the CPC Central Committee in September, policymakers discussed the economic situation, and highlighted the need to "intensify counter-cyclical adjustments of fiscal and monetary policies" and "lower the reserve requirement ratio, alongside significant interest rate cuts". These remarks reflect a notably more proactive stance than prior meetings. Earlier, at a press conference on financial support for high-quality development, new financial measures - "three arrows" were unveiled, including reducing the reserve requirement ratio and policy rates, cutting mortgage rates for existing home loans, and introducing new monetary tools to stabilize the stock market. Shortly thereafter, the Ministry of Finance of the People's Republic of China introduced incremental measures across four areas, including significantly raising the debt ceiling to help local governments manage implicit debts; issuing special government bonds to support state-owned commercial banks in replenishing core tier-one capital; leveraging a mix of special bonds, special funds, and tax policies to stabilize the real estate market; and boosting support for key demographics.

Review of the Four-Trillion-Yuan (US$586 billion) Stimulus Package for Insights into Current Incremental Policies

In 2008, China introduced ten key measures to mitigate the impact of the global financial crisis, designed to provide counter-cyclical adjustments and preventing an economic downturn. These measures targeted various sectors, including infrastructure, public welfare, and industry. Key initiatives included accelerating the development of affordable housing, rural infrastructure, and major transportation networks; advancing the growth of healthcare, culture and education sectors; fostering independent innovation and structural adjustment; and increasing financial support for economic expansion. By the end of 2010, the plan was expected to generate investments totaling four trillion yuan, earning the initiative the name "Four-Trillion-Yuan" Plan.

Regarding funding sources, the "Four-Trillion-Yuan" plan saw approximately 70% of investments from local fiscal finances, local financing vehicles, and social investments, with the remaining 30% contributed by the central government. Specifically, the central government has injected an additional 1.18 trillion yuan, mainly through central budget investments and post-disaster recovery funds, among other channels. On the other hand, local finances, local financing vehicles, and social investments contributed 2.82 trillion yuan, mainly sourced from local financial budgets, and centrally issued local government bonds, policy loans, enterprise (corporate) bonds, medium-term notes, and bank loans, alongside private sector contributions. Consequently, during the period of the "Four-Trillion-Yuan" plan, the local government debt leverage ratio saw a sharp rise, increasing from 11% in 2008 to 16% by 2010. The interest-bearing debt of local financing vehicles grew at an exceptional rate of 100% in 2009, and the loan balances of financial institutions also saw a significant year-on-year increase, peaking at over 34% in the latter half of 2009.

With regard to sectors receiving support, the largest share of investments, about 70% was directed towards infrastructure development. Estimates by the National Development and Reform Commission show that nearly 2.9 trillion yuan, or 72% of the total "Four-Trillion-Yuan" investment, was allocated to the infrastructure sector. In addition, it has invested heavily, with a total of about 1.5 trillion yuan in key projects including railways, highways, airports, water management systems, and urban grid system upgrades. Around1 trillion yuan has been allocated for disaster recovery, while approximately 370 billion yuan has been earmarked for rural public welfare and infrastructure, mainly focusing on critical areas such as water, electricity, roads, gas, and housing. A further 400 billion yuan (10%) went to affordable housing initiatives, including low-rent housing and shantytown renovations. The industrial sector received 370 billion yuan (9%) to promote independent innovation and structural adjustment. Environmental projects, including energy saving and ecological conservation, accounted for 210 billion yuan (5%). Public welfare initiatives such as health care, education, and cultural development were supported with an investment of 150 billion yuan (4%).