China’s growth dilemma: More stimulus, but where is the demand?

(Edited and refined by Candice Chan, with the assistance of AI translation.)

China has rolled out a flurry of fiscal, monetary, property and consumption policies in recent weeks, as it seeks to achieve its full-year economic growth target of 4.5% to 5%. With economic growth slowing and exports facing external risks, including trade friction with the European Union, the need to boost domestic demand has become increasingly urgent.

China’s economy grew 4.6% in the first nine months of the year, with growth slowing from 5% in the first quarter to 4.3% in the second, and then up 4.5% in the third. On 13 October, before the release of the third quarter figures, the International Monetary Fund had lowered its forecast for China’s economic growth this year from 4.6% to 4.5%.

Academics interviewed noted that this year marks the beginning of China’s 15th Five-Year Plan (2026–2030), while the fifth plenary session of the 20th Central Committee of the Chinese Communist Party (CCP) is also scheduled for the end of the month. The authorities therefore face pressure to spur economic growth in the remaining two and a half months of the year to meet their annual target. “If the target is missed in the first year, confidence could take a further hit.”

The key test for the latest policies is whether they can translate into actual demand, particularly household consumption and business investment.

Fiscal, monetary and property measures

Late last month, a State Council executive meeting called for stronger countercyclical adjustments to macroeconomic policies and additional measures, with a focus on stabilising the property market, promoting employment and raising household incomes.

On 9 October, the Ministry of Finance announced plans to utilise 550 billion RMB (US$82 billion) in unused local government debt quotas. Of this, 300 billion RMB will be allocated to counties and districts to strengthen their fiscal capacity, while the remaining 250 billion RMB will be used to expand effective investment, with priority given to projects already under construction. The funds will come from previously approved but unused debt quotas, rather than newly authorised borrowing.

On the monetary front, the People’s Bank of China increased its relending quotas for technological innovation, equipment upgrades, agriculture, small businesses and private enterprises on 29 September. It also lowered the interest rate on pledged supplementary lending from 1.75% to 1.5%.

In the property sector, China introduced a one-year mortgage interest subsidy scheme on 1 October, offering eligible first-time homebuyers a subsidy equivalent to one percentage point of their annual interest rate on commercial housing loans. The subsidy applies to a maximum loan principal of 1 million RMB and can be provided for up to five years.

The consumer goods trade-in programme will also continue, while the authorities have pledged to promote employment and increase household incomes.

These measures are aimed at making better use of existing funds and channelling resources into priority areas, rather than unleashing a broad-based, large-scale stimulus.

Weak consumption and debt pressures

During China’s seven-day National Day holiday, domestic tourist trips reached 826 million, generating approximately 738.4 billion RMB in spending. However, average spending per trip fell 1.9% year-on-year to around 894 RMB, the lowest for the same period since 2022.

Meanwhile, box-office takings during the National Day holiday amounted to approximately 1.16 billion RMB, a year-on-year decline of 36.6% and the lowest for the corresponding period since 2014.

Nomura Securities analysed that continued population outflows from lower-tier cities and a lack of confidence in the outlook for property prices could limit the effectiveness of mortgage interest subsidies in boosting home sales.

The Wall Street Journal reported on 12 October that China’s credit to the nonfinancial sector topped 300% of GDP, 60 percentage points higher than at the end of 2019.

The report noted that much of the money has gone towards “financing factories and apartment blocks for which there isn’t enough demand, sparking debilitating price wars, and hurting profits and wages”. As businesses increasingly turn to exports to absorb excess production capacity, trade friction has also intensified.

The Financial Times reported on 11 October that local government interest payments on debt had grown by an annual average of approximately 16% since 2014. Combined interest payments by the central and local governments are expected to reach 1.4 trillion RMB in 2026, adding further pressure to public finances.

In Shen’s view, the fundamental problem facing China’s economy is a mismatch between supply and consumer demand. If households lack the purchasing power and confidence to spend, further incentives for producers will merely expand capacity without generating sufficient demand to absorb the additional output.

Boosting domestic demand, he argued, requires raising household incomes, safeguarding employment and improving expectations about the future.

Industrial transformation also presents a dilemma.

Shen explained that both advanced technology sectors and traditional industries require policy support. Traditional industries, in particular, provide substantial employment and shoulder significant social responsibilities, making it difficult to abandon them. “We need to build on our strengths while also addressing our weaknesses.”

He argued that traditional industries should adjust production capacity, improve efficiency and increase value added, while emerging industries must accelerate their development and generate new sources of growth.

Given China’s vast population and uneven regional development, industrial transformation will take time. Exports can help create breathing room for domestic restructuring, but trade friction makes the transition more difficult.

Further stimulus likely to be moderate

Associate professor Gu Qingyang of the Lee Kuan Yew School of Public Policy (LKYSPP) at the National University of Singapore (NUS) told LHZB that China could still introduce further stimulus measures over the next two months. However, rather than resorting to massive, indiscriminate stimulus, Beijing is likely to rely on targeted fiscal and monetary policies to balance economic growth with structural adjustments.

He expects any additional measures to be moderate in scale and possibly introduced after the CCP’s fifth plenary session.

On the weakness in domestic demand, Gu said, “China’s demand problem cannot be solved by looking at demand alone. We need to address insufficient consumption by considering how supply and demand interact.”

He believes that improving the business environment and reducing operating costs, including corporate taxes and social security contributions, would encourage companies to expand investment and create jobs, thereby raising household incomes.

The adoption of artificial intelligence could also help reduce costs and improve efficiency. “As the overall economic pie grows, more workers will be needed.”

Turning to local government finances, Gu noted that the property downturn had reduced revenue from land sales, while poor investment returns at some local government financing vehicles had compounded debt repayment pressures.

Addressing these problems would require diversifying revenue sources beyond land sales and redefining the division of administrative responsibilities and fiscal powers between the central and local governments.

Gu expects China’s full-year economic growth to reach at least 4.5%, although it may not exceed 4.7%. He considers 4.6% a relatively favourable outcome.

Shen, meanwhile, believes that the official growth figure could ultimately come in close to 5%. However, even if China achieves 5% growth, he said, “Just like last year, ordinary people won’t feel that the economy has grown.”

This article was first published in Lianhe Zaobao as “中国密集推稳增长措施 内需弱和地方债“拖后腿””.

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