China introduces a massive £1.08 trillion economic stimulus plan to combat mounting debt issues
Boosting Consumption and Managing Debt: China's New Stimulus Package
China has unveiled a comprehensive stimulus package aimed at boosting consumption and addressing local government debt. The package, worth an estimated ¥10 trillion (£1.08 trillion), includes a variety of measures designed to stimulate economic growth and stabilise the economy.
To boost consumption, China has expanded consumer subsidies, allocated funds for the trade-in program, promoted services sector growth, and planned marginal support tools. The trade-in program, offering significant discounts on goods such as new energy vehicles, home appliances, electronics, and even smartphones and rice cookers, has generated over 1.7 trillion yuan in sales revenue and contributed to a 5-6% year-on-year growth in retail sales in early 2025.
The fiscal stimulus and subsidies have correlated with improved retail sales and stronger demand for domestic brands and services, suggesting some success in shifting consumer preferences and boosting consumption. However, structural issues remain, such as high youth unemployment and stagnant household consumption rates, which dampen optimism about sustained consumption growth.
To address local government debt, the government has accelerated the issuance of special-purpose local government bonds, issuing over RMB 2.6 trillion (US$362 billion) by July 2025. This move allows local governments to refinance existing debts at a lower interest rate, yielding ¥600 billion (£65 billion) in savings over five years.
Despite the new stimulus, analysts urge caution due to persistent economic and debt challenges. For instance, debt levels in many provinces have doubled from 2018 to 2023, and China's public debt, including local government financing vehicles (LGFVs), has risen from 73% in 2019 to 102%, according to Morgan Stanley estimates.
The stimulus package does not include measures to facilitate bank recapitalisation or boost consumption, and there is a mismatch between investors' expectations and Beijing's priorities regarding further stimulus. Moreover, local governments in China are responsible for the bulk of public spending and lack reliable revenue sources.
As markets await more details on the stimulus plans, China's central government, which has relatively low debt levels, is taking a cautious approach, combining bond-funded infrastructure investment with targeted consumption incentives. The aim is to balance growth stimulus while avoiding past excesses, but effectiveness depends on maintaining growth momentum amid domestic and global uncertainties.
References:
- Bloomberg
- Reuters
- Financial Times
- CNBC
- Wall Street Journal
- To supplement their income, some businesses in China are considering investing their savings in businesses that are offering services or products with increased demand due to the trade-in program and consumer subsidies, as part of the stimulus package aimed at boosting consumption.
- Moreover, analysts suggest that the Chinese government could generate additional savings if they consider tariff reforms on imported goods such as gold, which could potentially lead to increased consumption of domestically produced alternatives and strengthen the domestic finance market.
