S&P Global Ratings senior analyst Yunbang Xu said there are signs that the fiscal stimulus announced by the Chinese government is losing its effectiveness. He added that the analysis used government spending growth to measure fiscal stimulus.
"We believe that fiscal stimulus is a buy-time strategy that could have some longer-term benefits for the industrial sector and the consumer sector," Xu said, warning that high debt levels limit the scope of fiscal stimulus that local authorities can undertake, regardless of whether the city belongs to the regions with high or low income.
S&P Global Ratings said that public debt as a share of GDP can range from about 20% in a high-income city to 140% in a much smaller low-income city.
"Given the current situation, we believe that local governments need to focus on reducing red tape and taking other measures to improve the business environment and support long-term growth and living standards. Investments are becoming less effective against the background of a sharp downturn in the real estate sector,” S&P Global Ratings reported, adding that based on data for 2020-2022, local government budget incentives were generally more extensive and effective in richer cities.
"Industry, consumption and investment will remain key drivers of growth in the future. High-tech sectors will continue to drive China's industrial modernization and become the foundation of long-term economic growth. However, excess production capacity in some sectors could spark price pain in the near term," Xu said.