China tries new tack to spur economic growth through stimulus effort

(By Caixin journalists Cheng Siwei, Yu Hairong, Wu Xiaomeng, Liu Ran and Denise Jia)

China has unveiled a wave of fiscal stimulus policies, signalling a shift in its approach to overcoming the nation’s economic headwinds. The plans — which began rolling out 24 September and involve multiple government agencies — represent an approach of “incremental policies” designed to boost domestic demand, stabilise stock markets and sustain growth.

Economists including Zhang Jun, chief economist at Galaxy Securities, estimate the sum of the stimulus could exceed 5 trillion RMB (US$702 billion). Some economists also remain cautious about the full impact of the strategy.

Investors, however, are leaning into optimism while awaiting further details on the scale of the new stimulus, likely to come during the 2025 legislative sessions. The benchmark CSI 300 Index posted its biggest weekly gain in 16 years following the policy rollout. Share prices pared gains following the National Day holiday, then surged again after the central bank cut reserve ratios and injected 300 billion RMB for share buybacks on 18 October. As of 18 October, the benchmark stood 24% above its five-year low of mid-September.

Zheng Shanjie, head of the National Development and Reform Commission, the country’s top planner, said the new plans focus on five key areas: counter-cyclical support to reverse economic downturns, boosting domestic demand through improved public services, targeted assistance for struggling businesses, stabilising the fragile property market and reviving equity markets.

The initiatives include issuing special government bonds to back large state-owned banks and the conversion of unsold properties into affordable housing. Finance Minister Lan Foan suggested that larger deficits and long-term bonds remain on the table, raising speculation about the total scale of fiscal expansion.

Lan’s remarks on borrowing echoed an iconic metaphor from Henry Paulson, former US Treasury secretary, who said during the 2008 financial crisis: “If you’ve got a bazooka [in your pocket] and people know you’ve got it, you may not have to take it out.” Paulson’s point was that the availability of powerful financial tools can restore market confidence — often without needing to deploy them — a principle that China seems prepared to follow.

The new strategy represents a shift from infrastructure-led growth towards sustainable development. Experts such as Nomura’s chief China economist Lu Ting suggested the supporting areas of the incremental fiscal policies are more important than their scale. Liu Shijin, former deputy head of the State Council’s Development Research Center, emphasised the need to improve urban public services, promote the urbanisation of small and medium-sized cities, and to create long-term demand and growth.

As China recalibrates its economic policies, all eyes are on the 2025 legislative sessions, where further details are expected to solidify the new direction. Investors and analysts are watching to see whether the fiscal “bazooka” will deliver what the economy needs.

The biggest and most unexpected new policy directs support for local governments to reduce their debt.

Finance Minister Lan announced plans to significantly raise the debt quota, allowing local governments to swap their hidden borrowings. While the specific size of the one-time increase was not disclosed, Lan emphasised that it is the most ambitious debt-relief initiative in recent years.

The policy reverses earlier rules that barred the use of special-purpose bonds (SPBs) to refinance old debt. Now, the securities will be repurposed to manage debt loads, offering local governments greater flexibility. Provinces such as Henan and Dalian in Liaoning have already tapped new SPBs to repay existing liabilities. Of the 3.9 trillion RMB in new SPB quotas for 2024, 800 billion RMB will be allocated to debt swaps.

Historically, efforts to resolve local government hidden debt has been limited in scope, with debt restructuring pilots conducted in select regions. The recent announcement represents a departure from previous conservative strategies. Analysts note that the policy shift is essential for addressing the squeeze on fiscal spending due to declining tax revenue and shrinking land sales, both of which have constrained local governments’ ability to fund public services and infrastructure.

The scale of the debt swap remains unclear but is expected to exceed 2.2 trillion RMB, with some analysts comparing it to the 12.2 trillion-RMB debt replacement programme conducted between 2015 and 2018. However, the new plan specifically targets hidden debt, rather than just those on the books.

China may raise an additional 6 trillion RMB from treasury bonds over three years, part of which will be used to help local governments resolve their off-the-books debt, multiple sources with knowledge of the matter told Caixin.

Lan emphasised the importance of guiding local governments to responsibly manage debt while freeing up financial resources for economic development and public services. He noted that by the end of 2023, the balance of hidden borrowings were cut in half from 2018.

Analysts view the new debt policy as a strategic pivot toward transparency. Zhang Jiqiang, an analyst at Huatai Securities, said the shift to swap hidden borrowings aligns with the government’s goal of eliminating hidden debt by 2028. However, he cautioned that local government financing vehicles’ operational debt outside the hidden debt framework still requires attention.

Experts suggest that achieving fiscal stability will depend not only on economic recovery but also on improved financial oversight and tighter accountability mechanisms at the local level.

The real estate slump, which has been a drag on China’s economy the past three years, is another area the new policies aim to address.

At an 17 October press conference, Housing Minister Ni Hong pointed to early signs of recovery in the property market as evidence that recent measures are taking effect. They include lifting purchase restrictions and lowering down payment requirements, mortgage rates and taxes.

Ni also announced two new initiatives: the development of 1 million new affordable housing units through urban village renovation and expanding lending for whitelisted property projects to 4 trillion RMB by the end of the year. These projects are those with sufficient collateral that can obtain the financing to complete construction and deliver to buyers.

The government aims to deliver 3.96 million units by the end of 2024, with financial institutions instructed to prioritise funding for whitelisted projects. As of 16 October, 2.23 trillion RMB in loans have been approved for these projects.

To further ease developer burdens, Vice Finance Minister Liao Min announced on 12 October that local governments can now use SPBs to buy back undeveloped land. In some regions, SPB proceeds will also be used to replenish land reserves for future sales.

Addressing the housing surplus, the Ministry of Finance has introduced policies to encourage affordable housing and digest the existing housing stock. With unsold housing inventory at historically high levels — estimated to take 3.4 years to clear — local governments are encouraged to convert commercial properties into affordable housing using SPBs and other financial tools.

The central bank will fully fund a 300-billion-RMB loan initiative for state-owned enterprises to buy unsold homes and turn them into affordable housing units. The SOEs will get loans from 21 national banks, which will then receive the principal in full from the Peoples Bank of China, instead of 60% as previously announced. But Zhong Zhengsheng, chief economist at Ping An Securities Co. Ltd., estimated that as much as 2 trillion RMB will be needed to effectively clear the inventory.

In a move reminiscent of previous efforts to revive the market, the government will accelerate urban renewal projects, including the renovation of 1 million additional units through monetised resettlement. However, unlike earlier initiatives that led to hidden local debts, the latest round targets larger cities and emphasises financial sustainability. Analysts estimate that the renovation and resettlement efforts could drive demand for nearly 100 million square metres of residential space.

China confirmed on 12 October that it will inject capital into six large state-owned commercial banks through special bonds. Vice Finance Minister Liao Min stated that this injection aims to stabilise bank operations and enhance their lending capacity to support economic recovery.

This marks the first capital injection of its kind since 1998 when the Ministry of Finance raised 270 billion RMB through special bonds to recapitalise four major banks. This time, the capital support expands to six banks. The total injection could reach up to 1 trillion RMB, according to insider sources, helping these banks increase their core capital ratios by around 1%.

A key goal of the capital injection is to boost credit supply by increasing banks’ lending capacity at lower costs. Experts noted that enhancing the banks’ core capital provides a multiplier effect — allowing them to lend more aggressively to the real economy. Some analysts estimate that the injection will result in 12.5 times leverage.

China’s latest policy package marks a shift from conventional stimulus measures to focus on structural reforms and long-term economic stability. Dong Yu, executive vice-president of the China Institute for Development Planning at Tsinghua University, emphasised that the impact of these policies lies not just in numbers but in key structural changes, including fostering a better environment for private businesses.

At a 24 September meeting of the Politburo, the Communist Party’s top decision-making body led by Chairman Xi Jinping, leaders committed to easing regulatory burdens on enterprises. This includes curbing practices such as excessive fines and inspections, which have disrupted normal business operations. On 14 October, officials announced steps to reduce random inspections and enforce more balanced regulations to support business growth.

A proposed Private Economy Promotion Law, published for public consultation on 10 October, signals further policy shifts. The draft emphasises “two unwavering” principles: long-term support for the private sector and promoting entrepreneurial spirit. For the first time, fair competition and regulatory oversight will be embedded into law, aligning policy with market needs.

The government is also accelerating urbanisation to boost investment and consumption. Officials aim to ease restrictions on household registration, known as “hukou”, in cities with populations over 3 million, facilitating the settlement of more than 170 million rural migrant workers. Policies will also enhance education, healthcare and rental housing access for migrants to improve urban integration.

A related reform proposes aligning public service funding with population mobility. Liu Shangxi, president of the Chinese Academy of Fiscal Sciences, suggested that transfer payments — the financial allocations from the central government to local governments intended to reduce regional disparities and fill the fiscal deficit of recipient regions — should “follow the people”, ensuring migrant populations receive the same level of public services as registered residents, bridging urban-rural gaps.

Zhang Yansheng, a senior researcher at the China Academy of Macroeconomic Research, urged reforms mirroring those from 1998 to 2002. He advocated for short-term actions to stabilise investment, medium-term policies to resolve structural issues, and long-term strategies to foster high-quality development. The ultimate goal, he argued, is to restore confidence — getting businesses to invest, consumers to spend, and local governments to take strategic risks.

Wang Shiyu and Zhang Yuzhe contributed to this report.

This article was first published by Caixin Global as “Cover Story: China Tries New Tack to Spur Economic Growth Through Stimulus Effort”. Caixin Global is one of the most respected sources for macroeconomic, financial and business news and information about China.

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