S&P: China's fiscal stimulus is losing its effectiveness

China's fiscal stimulus is losing its effectiveness, being more of a strategy to buy time for the country's industrial and consumer policies, says Yunbang Xu, senior analyst at S&P Global Ratings, in a report published last week, writes CNBC.

To measure the effectiveness of fiscal incentives, the analyst used the increase in government spending, according to the American publication.

"In our view, the fiscal stimulus is a strategy to buy time, which may have some longer-term benefits if projects are focused on consumption revival or industrial upgrades that increase added value," Xu said.

China has set a GDP growth target of about 5 percent this year, a goal that many analysts said was ambitious given the level of stimulus announced. In March, the head of the country's largest economic planning agency said the country would "strengthen macroeconomic policies" and strengthen coordination between fiscal, monetary, employment, industrial and regional policies.

According to the S&P report, high debt levels limit the amount of tax incentives a local government can benefit from, regardless of whether it is part of a high-income or low-income region. Public debt as a share of GDP can range from around 20% for a high-income city like Shenzhen to 140% for low-income and small-sized cities.

"Given fiscal constraints and declining stimulus effectiveness, we expect local governments to focus on cutting red tape and taking other measures to improve the business environment and support long-term growth and living standards Xu wrote in the S&P report. "Investments are less effective, against the background of the drastic slowdown of the real estate sector".

Investment in fixed assets picked up in March from the first two months of the year, thanks to an acceleration in manufacturing investment, according to official data released last week. Investments in infrastructure slowed their growth, while investments in real estate fell even more, writes CNBC. Earlier this year, the government in Beijing announced measures to support domestic demand through subsidies and other incentives for upgrading equipment and purchasing consumer goods. Official estimates are that the measures will result in annual spending of more than five trillion yuan ($704.23 billion) on equipment alone.

The S&P analysis found that local government tax incentives were generally larger and more effective in wealthier cities from 2020 to 2022.

"Cities with higher incomes are in the lead because they are less vulnerable to declining housing markets, have stronger industrial bases, and their consumption is more resilient to recessions. Industry, consumption and investment will remain the main growth drivers in the future," Xu said in the report. "High-tech sectors will continue to drive China's industrial modernization and support long-term economic growth. But overcapacity in some sectors could cause short-term price headwinds," added the analyst, quoted by CNBC.