What size stimulus will be enough to jumpstart China’s economy?

China’s government threw some serious money at the economy, leading to a brief surge in the stock market. The CSI 300 index in Shanghai and Shenzhen jumped by 25%, and Hong Kong’s Hang Seng shot up by 21% in just two weeks.

But that excitement didn’t last long. Investors expected more. They wanted clear signs that Beijing was committed to putting cash into the real economy, not just waving it at the stock market. That could trigger a rally in financial markets, including crypto.

Real estate and local government debt

Now so far, the Chinese government has been tight-lipped about its actual plans. There are hints of fiscal stimulus coming, but nobody really knows what President Xi Jinping’s endgame is.

Some believe the government is trying to fix the deeper issues in the economy. Others think it’s all about hitting that 5% GDP growth target by year’s end.

There’s also a chance the government just wants to make China’s markets look good. Either way, investors are left guessing, and patience is running thin.

First off, China’s real estate sector is a disaster. The government has plans to help by issuing bonds to local governments so they can buy back idle land and unsold new homes from developers.

French bank Natixis crunched some numbers and estimated this will cost around Rmb3tn ($421bn). But that’s assuming the government will buy properties at 70% of their market value, which may not happen.

Then there’s the problem of local government debt. Local governments in China have a lot of risky “hidden” debt, especially after COVID caused real estate prices to tumble and businesses to close.

Estimates say this debt is between Rmb50tn and Rmb80tn ($7tn-$11tn). China is thinking about allocating Rmb6tn ($853bn) by the end of 2027 to deal with this risky local debt. That’s a long way off.

The tough part

The last two areas of focus for China’s stimulus efforts (bank lending and consumer support) are harder to measure. 

Historically, like after the 2008 financial crisis, China injected Rmb4tn ($580bn at the time) into its economy. Adjusted for today’s GDP, that would be about Rmb16tn ($2.2tn).

Economists say China’s current growth trajectory will only hit 4.8% GDP growth by year’s end. To reach the 5% target, the government needs an additional Rmb252bn ($35bn) in output by the end of the year.

China could try to hit that target with government spending or by doubling down on efforts to boost exports.

Investor confidence and market volatility

Investors want instant results. They’re looking for a quick, massive injection of cash — something like 1-2% of GDP over the next year.

Highly doubt the government is going to deliver that, but it’s possible Beijing might try to calm investors with a one-time cash injection, somewhere between Rmb1tn and Rmb2tn ($140bn-$280bn).

This would give the markets a jolt, even if it doesn’t solve the deeper economic issues. They could also throw in some extra goodies, like easing restrictions on Western businesses or issuing more business visas.

The real issue, though, is communication. Investors want to know what the government is planning. Without clear communication, the market is just left to speculate. And that means more volatility. Just look at what happened when the government started to act.

For now, we remain in a wait-and-see mode.