China's mass stimulus campaign in 2025 is designed to tackle local government debt risk, supercharge domestic consumption. 

The Central Economic Work Conference held in December called for "even more active fiscal policy" in tandem with "moderately loose monetary policy.

Domestic economists say this rare combination of phrases from China's political leaders portends unprecedented stimulus in 2025, potentially dwarfing the 4 trillion spending program cooked up Beijing after the Global Financial Crisis. 

The post-GFC stimulus package enabled China to pull through without seeing a recession, yet sharply increased the "hidden debt" burden of local governments, who had to leverage up to drive spending. 

Yang Delong (杨德龙), chief economist at First Seafront Fund, says the upcoming stimulus campaign this year will be designed to both:
1. Deal with the systemic risk implications of huge volumes of hidden local government debt. 
2. Drive China's transformation into a nation of consumers. 

"At present the fiscal policy unveiled mainly consists of 10 trillion yuan in [local government] debt dissolution," Yang wrote, in reference to the issuance of regional bonds used to roll-over outstanding debts. 

"This will greatly reduce the pressure of principal and interest repayments for local governments."

Yang expects China's central government to also lift up its own leverage to spur consumption. 

"If [China] truly wants to increase consumption and comprehensively expand domestic demand, then fiscal policy needs to comes into play," he wrote. 

"The next step could be for the central government to use the issuance of government treasuries to directly spur investment and drive consumption...it still has considerable room for debt raising," Yang wrote. 

"In 2025 the fiscal deficit could breakthrough the 4% threshold and rise to 4%. 

"In this way, we could see the issuance roughly two trillion yuan in treasuries to drive domestic demand."

Fiscal measures to boost consumption will primarily involve China's "cash-for-clunkers" campaign to subsidise the purchase of durable goods, as well as large-scale capital upgrade subsidies. 

Yang expects that these programs could spur one trillion yuan in additional Chinese consumption. 

Source: "杨德龙：2025年宏观经济形势与资本市场行情全面分析." Sina, 10 January, 2025.

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