In recent weeks, Beijing policymakers have begun to roll out a significant package of easing measures designed to lift China from its prolonged period of economic weakness. While the sense of urgency behind these series of announcements is encouraging, it remains to be seen whether the measures may stimulate Chinese economic growth out of its doldrums.
So far, the measures have centered on aggressive monetary policy easing measures aimed at underpinning the beleaguered real estate market and Chinese equities. However, that was coupled with a series of pledges to boost fiscal spending and other non-monetary measures to stabilize the problematic property sector. Global markets initially reacted quite positively, with the MSCI China Index and the Shanghai Composite Index notching more than 20% gains in a few days. Since that initial surge, markets have been drifting lower as questions remain about the size and implementation of the various measures.
Persistently weak economic growth triggers aggressive easing measures
The People’s Bank of China (PBoC), together with two financial regulators, announced a series of easing measures aimed at supporting real estate demand by cutting mortgage rates, reducing downpayment requirements, and unveiling a plan to encourage banks to finance purchases of housing inventory from distressed developers.
Authorities also created a Rmb800bn lending pool to provide liquidity to support the equity market through various market participants and pledged to increase that amount if needed. The PBoC is also considering a National Stabilization Fund, which would involve government sponsorship of the equity market.
These measures are aimed at stabilizing and underpinning China’s soft economic performance as the surge in economic growth that followed 2022’s lifting of Beijing’s harsh zero-COVID policy dissipated. Both consumer and investor confidence remain deeply depressed, scarred by the pandemic, and further dragged down by weakening household incomes and persistent fears of a deflation trap stemming from the troubled real estate market. Multiple rounds of policy actions through the last two years have fallen far short, failing to recognize that a lingering property rout along with indebted local governments require meaningful stimulus, effective implementation and—most importantly—fiscal expansion. As a result, fears blossomed that China may miss its 5% GDP target for 2024, raising pressure on the Politburo to act aggressively to stimulate economic growth and squelch rising talk of “Japanification.”
Two weeks following the stimulus announcement, policymakers in China further announced specific policies on local government debt relief, bank recapitalization, property buyback, and poverty alleviation. While the plans fall short of concrete numbers investors were keenly looking for, the Ministry of Finance (MoF) did emphasize that the central government has the capacity to increase fiscal deficit and issue more treasury bonds. The PBoC and MoF also set up a joint working group to strengthen collaboration on treasury bond operations, increasing the likelihood of coordinated monetary and fiscal stimulus.
Market optimism will be tested
Investors welcomed last month’s news with cautious optimism. The fiscal pledge announcement suggests that policymakers finally recognized that the lingering property rout and indebted local governments require meaningful fiscal expansion—and that monetary stimulus typically proves most effective working in conjunction with fiscal stimulus.
Ultimately, provided the magnitude of the fiscal measures is sizeable, and policymakers proactively and sufficiently target rejuvenating the property sector, prospects for China’s economy are likely to improve. This stimulus package may mark a pivotal moment for China—but it all comes down to the details.
