Will China’s policy stimulus be enough?

China is grappling with domestic economic challenges at the same time that external risks from US trade threats are rising. In response, Chinese policymakers have announced a raft of stimulus measures, which they doubled down on just last week. But will the stimulus be enough? In the short term, we're

probably going to see an expansion of fiscal support, much greater than we've seen already. Probably in the Q1, we will finally start to see real attempts to stimulate the demand side of the economy, and that will be very positive in the short term. But, ultimately, it's only a short term solution.

I'm Alison Nathan, and this is Goldman Sachs Exchanges. Each month, I speak with investors, policymakers, and academics about the most pressing market moving issues for our top of mind report from Goldman Sachs Research. This month, I spoke with China watchers Hui Shen, chief China economist at Goldman Sachs, and Michael Pettis, professor at Peking University's Guan High School of Management. We discussed China's economic challenges and just how effective the policy stimulus could be in addressing them. I started off by asking my colleague, Hui, to level set on how China's growth has evolved i

There were quite a few surprises in the Chinese economy over the past couple years. If you think back the early 2023 reopening, if China had followed any other economies experience, there should be a very strong rebound. But 2023 growth was only 5.2% after 3% in 2022. So that was a disappointment given reopening boosted services activity. And then coming 2024, we had this surprise of very strong exports, but domestic demand continue to weaken, especially in the middle part of the year. I think that was a a clear downside surprise. GDP growth quarter after quarter in year on year terms was dece

And so, obviously, as you began to discuss, we have seen a slew of policy measures announced in the last couple of months. How effective do you think what they have announced so far will be?

The biggest policy change so far is the local government debt swap plan, and that's the 10 trillion r and b package approved by the National People's Congress standing committee meeting early November. That's the most important piece of all the easing measures announced so far. So this is trying to put out a fire and address the most urgent risk in the economy. Now is it effective? It's too early to tell. We think that this is important and underappreciated because in a typical debt swap, it just changing one form of debt to another. It doesn't do that much. It doesn't really change your funda

But is that quota allotment, that increase of new debt, is that big enough relative to the size of the outstanding debt? And is my understanding that they can issue that debt over 5 years? So is it too little, too late? Is

it enough? Is it perfect? Probably not in the grand scheme of things in the sense that overall local government financing vehicle total interest bearing liabilities are over 60 trillion. And, in that context, if you give them, you know, 2 +1,000,000,000,000 a year, doesn't seem to be that important. But I think of it as 2 things. So one is we estimate that this year's fiscal shortfall is a little over 2,000,000,000,000 RMB. So in that sense, central government now give them 2,800,000,000,000 per year of additional quota seems to be enough to just cover the whole. So the central government did

there any other policy developments that can move the needle?