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China ramps up spending as trade war bites, weighing on its debt burden

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Governments use economic stimulus packages to boost growth and lead an economy out of a recession or slowdown, even though the interventionist policy has been controversial since its birth. Governments use expansionary monetary and fiscal policies as their two main tools.

As the trade war between the United States and China weighs on China’s growth, Beijing’s policymakers are resorting to such tools – marking a policy shift from tightening towards loosening.

But the trade war has come at the worst time for China. The government has less leeway to stimulate the economy through monetary or fiscal measures, as the economy is already slowing and the government is struggling to reduce the debt burden amid a very big debt overhang.

The short-term effects of the trade war have already inflicted pain on Chinese asset and currency markets, triggering panicked sell-offs of Chinese assets and the currency in the past three months. China’s stocks have entered bear market territory, losing more than 30 per cent since the peak in January. The yuan has seen an 8 per cent decline from its March peak.

The long-term impact is that uncertainty is likely to lead to sweeping diversification or substitution among consumers........

© South China Morning Post