Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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China unleashes CNY 50 trillion stimulus to reflate its economy
Charu Chanana
Chief Investment Strategist
Summary: Having created history’s most epic debt bubble, China boldly bets that fiscal stimulus to the tune of trillions of CNY is the only answer.
China is mired in a classic balance sheet recession akin to the Japanese experience of the 1990’s. In an epic binge, the country inflated a corporate debt and real-estate debt bubble without parallel in global economic history. China’s corporate debt alone stands at north of 150% of GDP. Local government debt is on the order of another 80-90% of GDP. Household debt is not as high as elsewhere, but much is linked to a suffering real estate market.
When countries enter a balance sheet recession, every actor in the economy, both public and private, is strongly incentivised to pay down debt to repair balance sheets. But this effort to improve finances only worsens the collective outlook as economic activity and prices crater. The government can choose many paths in a balance sheet recession, but all come with significant risks. If you write off the debt, the economy deflates and the wealthy class of creditors is crushed. If you do nothing, the country can stay in a decades-long malaise. If you run massive trade surpluses to have other countries finance your balance sheet repair as China is already trying to do, you risk the ire of other nations and trade wars. If you force a reflation with massive fiscal stimulus, inflation can create social unrest.
In 2025, China makes a bold bet that reflation is the only answer and thinks it can manage the inflationary risks as it unleashes a gargantuan set of fiscal initiatives that add up to promises of more than CNY 50 trillion (about USD 7 trillion) in 2025 and the following years. Much of the spending goes directly into consumers' pockets via e-CNY digital currency, so that it will be injected straight into the economy rather than to pay off debt. China also adds heavy doses of social engineering in its stimulus, incentivising companies to reduce working hours to improve quality of life. This boosts leisure time, consumption, company formation, family formation and childbearing.
Potential market impact: A strong reflationary impact in China and the world, outperformance of EM relative to DM and China in particular, higher commodity prices globally, a stronger Chinese renminbi.
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