China is considering pumping more than 1 trillion yuan of fiscal stimulus into the economy over the next three years, reported Xinhua, China’s state news agency.

Anywhere from 1.2 trillion yuan ($188 billion) to 1.5 trillion yuan may be taken from government coffers to replenish the capital for investment projects already approved by the authorities, according to the latest report from the China International Capital Corp. (CICC), a Chinese investment bank.

This amount of stimulus has the potential to spark not only policy banks, but also commercial lenders and private investors, to invest 5 trillion yuan to 7 trillion yuan over the next three years. This would equal 2.5% to 3.4% of the 2015 gross domestic product.

The world’s second-largest economy is seeing growth slow down to 7% because of a property downturn, industrial overcapacity, sluggish demand and struggling exports.

Fiscal policy has moved to center stage in growth stabilization, as the room for monetary loosening became more constrained after several interest rate cuts and fiscal deposits continued to increase, according to the CICC.

The move indicated that China’s fiscal policy will be “firing on all cylinders to support growth”, the CICC said.

If this is true, Asia Unhedged believes this will be more than just a shot in the economy’s arm. However, over the tumultuous summer, China has already pumped a lot of money into the economy with little to show for it.

Partly because the Chinese economy is huge. And, it’s still growing. But, if the pundits are right and fundamentals are truly falling, then there could be serious problems.

There’s no doubt China is experiencing structural problems from its growth pains as it moves from an export economy to one based on domestic consumption. Japan tried this in the 90s and fell flat on its face. If the Chinese economy is truly falling to a growth rate of 6%, or even 5%, there won’t be rejoicing. The spit will be hitting the fan.

So, we will have to wait and see what the Chinese choose to do. But, if they fail, don’t have any illusions, the rest of the world’s economy will pay the price.

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