After the incremental policy

Core Viewpoints:

1. Is it all in the past, or just the prologue? With the central government's judgment of "facing difficulties," a recent package of incremental policies has been successively implemented. How much incremental economic growth can the existing incremental policies stimulate? At the same time, expectations of trade frictions after the U.S. elections are also strengthening. In response to potential external challenges, when will there be new incremental policies?

2. Unlike last time, Trump has nominated important officials earlier during this government transition period, which means that the pace of policy advancement will be faster after taking office. Implementing tariffs earlier and more significantly is likely to become a priority. Historical evidence shows that before the imposition of tariffs, there is a likelihood of a "rush to export" pulse in our country, and there have also been signs of U.S. companies "rushing to import" recently.

3. This round of incremental policies in our country seems to focus more on solving issues related to existing debts and real estate. The actual incremental support for short-term economic growth relies more on the implementation of previous stock policies such as bond issuance. Unlike previous debt reduction processes, this time there are stronger constraints on local new debt, and its intensity in counter-cyclical adjustments has significantly weakened.

4. Looking ahead, the mild pull from the implementation of stock policies on investments will be reflected later, combined with the probability of a short-term recovery in external demand, which may support a stabilization of actual GDP for 1-2 quarters, but prices remain sluggish. Given the pace of tariff implementation and the weakening of real estate, more challenges may arise in the second quarter of next year, along with an increase in incremental policies under discretionary choices.

Main Text:

Recently, a package of incremental policies has been successively implemented. How much incremental economic growth can the existing incremental policies stimulate? Expectations of trade frictions after the U.S. elections are also strengthening. In response to potential external challenges, when will there be new incremental policies?

1. External: How Great is the Challenge?

Unlike last time, Trump has nominated important officials earlier during this government transition period, which means that the pace of policy advancement will be faster after taking office. Implementing tariffs earlier and more significantly is likely to become a priority. Although he claims to impose a 60% tariff on China, it may not happen all at once, and he may adopt a "maximum pressure" followed by a "negotiation while fighting" strategy.

Figure 1. Tariffs: Earlier Timing, Greater Magnitude?

Although tariffs may be implemented earlier, our exports may still have short-term support. From the historical perspective of the two rounds of tariffs imposed by the U.S. on China in 2018 and 2019, there tends to be a phase of "rush to export" before the tariffs are imposed. Recent information indicates that since Trump's victory, some U.S. companies have begun to "rush to import."

Figure 2. Before the Tariff Increase: Export Rush

II. Internally: How to Respond?

China's current round of incremental policies focuses more on addressing issues related to existing debts and real estate. The support for short-term economic growth relies more on the implementation of previous bond issuance and other existing policies. Unlike past debt reduction efforts, this time there are stricter constraints on local new debt, with some regions even requiring that "the growth rate of bonds cannot exceed the local social financing growth rate."

Figure 3. Local New Debt: Constraints are Still Strengthening

Note: Local debt includes new local government bonds and urban investment bonds.

Although it is a year for debt reduction, based on past experience, at the end of the year, with surplus funds or bond issuance, there has typically been a preemptive fiscal push in the following year, leading to a short-term rebound in investment data. This round may be similar. In the first three quarters of this year, the progress of using new special bonds has been slow, with about 2.3 trillion yuan (approximately 65% of the annual total) still awaiting allocation for use in the fourth quarter.

Figure 4. The Lagging Pull of Existing Fiscal Funds on Investment

Looking ahead, the moderate pull of existing policy implementation on investment will be reflected with a lag. Coupled with the probability of a short-term recovery in external demand, it may support a stabilization process of actual GDP for 1-2 quarters, but prices remain low. Given the pace of tariff implementation and the weakening of real estate, more challenges may arise in the second quarter of next year. Based on historical experience, incremental policies may be intensified at that time.

Author of this article: Wu Ge, Source: Wu Ge Economic Notes, Original Title: "After Incremental Policies"