China Pledges Government Funds for Equipment Upgrades

(Bloomberg) -- China pledged central government funds to encourage consumers and businesses to replace old goods and equipment, a pillar of its plan for economic growth of about 5% this year.

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The action plan aims to increase spending on equipment in sectors such as industry, agriculture, transport, education and health care by at least 25% by 2027 compared with last year, the State Council said in a statement on Wednesday. It also intends to double the recovery of older cars and raise that of used home appliances by 30% during the period.

The program will get support from the central government budget alongside tax breaks and targeted lending from banks, the cabinet added. The statements didn’t specify the amount of government funding for the program, which was first mentioned by President Xi Jinping in February as a way of boosting demand for goods.

China’s 2024 growth target is seen as ambitious because the economy faces weak domestic demand caused by a housing slump and low confidence among businesses and consumers. Those forces are also leading to deflation, which is increasing tensions over China’s exports.

The plan should add 0.7 percentage points of growth each year until 2027, said Pantheon Macroeconomics’ Chief China Economist Duncan Wrigley. Most of the boost will come from support for car purchases, he said.

“The action plan includes incremental support each year up to 2027, putting a floor under domestic demand and providing space for industrial restructuring and resolving property sector issues without resorting to a big credit stimulus,” he added.

Officials are drafting rules and standards for rolling out the car replacement program, which could be launched in the second quarter, Chinese media outlet Cailian reported Thursday, citing sources in the industry whom it didn’t name.

China stocks fluctuated on Thursday, with the benchmark CSI 300 Index closing down 0.3%. The yuan traded onshore slipped 0.08% to 7.1927 versus the greenback.

Read More: China Sets GDP Goal That Needs Policy Support ‘From All Fronts’

Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc, said the equipment upgrade and consumer goods trade-in program may be the “closest we’ll get” in terms of direct stimulus targeting consumers. Addressing manufacturing overcapacity that has sparked growing tensions with trade partners may also be part of the considerations behind the initiative, he said.

“We are in an election year for a number of countries,” he said. “The competitive prices of Chinese products could indeed trigger more tensions with trading partners.”

“I believe policymakers also took into consideration the de-globalization trend, the investigations into some of China’s products and government subsidies,” Ding said.

In October, the European Union launched an inquiry into whether China was providing illegal financial support for the electric vehicle industry. Beijing later launched an anti-dumping investigation into brandy imported from the EU, a move seen as a retaliation against France, which supported the EV probe.

Further Spending

If China spends around 800 billion yuan ($111 billion) to provide a subsidy of 20% for purchases of upgraded cars, major home appliances and equipment, it could induce further spending of that amount this year, Goldman Sachs Group Inc. economists estimated in a recent report.

The State Council, which co-ordinates China’s government ministries, said equipment upgrades would focus on industrial equipment and items such as residential elevators. Consumer goods trade-ins will target home decoration products besides appliances, it said.

China’s state planning agency, the National Development and Reform Commission, said that it would work with relevant authorities to increase “fiscal, financial, taxation, and other policy support” for the equipment plan, without giving an amount for the support.

Meanwhile, an economist who advises the government said China needs to boost domestic demand and adjust its industrial policy to counter rising criticism from the US and Europe.

“We should pay serious attention and recognize that this could be an important development in geopolitics,” Huang Yiping, dean of the National School of Development at Peking University, said during an online forum before the action plan was published.

“A widespread protectionist wave against Chinese products would be bad for China’s future development and innovation,” he said.

--With assistance from Fran Wang.

(Updates with details, economist’s comments.)

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