China’s stimulus is hefty but insufficient

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A hastily convened, joint press conference with several Chinese economic officials on Tuesday unveiled a raft of stimulus measures designed to inject confidence back into China’s deflating economy. The blitz of interest rate cuts, funding for the stock market and support for the property sector amounts to the most aggressive economic package from the world’s second-largest economy since the Covid pandemic.

The shock and awe of it all excited investors. China’s CSI 300 share index jumped 4.3 per cent on Tuesday, its best day since July 2020. Global stocks also pushed higher. But what matters more for China and the global economy is whether the package can jump-start the substantive and sustainable boost to demand that the country desperately needs. By that measure, Beijing’s latest economic salvo does not go far enough.

Starting with the monetary measures, the People’s Bank of China (PBoC) announced a 50 basis point cut to banks’ required reserve ratios and made cuts to lending, mortgage and deposit rates. Together these measures should boost liquidity in the banking system and may support loan activity. Yet with businesses and households still eager to de-lever, as the fallout from China’s property market correction continues, a significant boost to loan demand would probably require heftier cuts to lending rates, particularly as real rates remain elevated as inflation has fallen.

Next, to revitalise its housing market — where prices are tumbling and sales are subdued — officials lowered the downpayment ratio for second homes. The PBoC also said it would provide better terms under a facility that lends to state-owned enterprises buying unsold inventory from property developers. Both amount to incremental improvements on existing policies that have, so far, had limited success in boosting sales. Reducing China’s vast stock of unsold housing is crucial to revive the economy, but economists reckon it warrants more subsidies or an effort to restructure debts in the sector.

Lastly, to revive its stock market, officials announced a Rmb500bn ($71bn) fund to help brokers, insurance companies and funds buy stocks. The PBoC will also provide funding to help companies conduct share buybacks. While markets responded positively, the measures can only be a temporary reprieve to more a fundamental problem: Chinese equity performance and investor confidence have been structurally weakened by Xi Jinping’s crackdown on tech firms and wealth creators.

The upshot is that Tuesday’s stimulus still fails to grapple with the reality of China’s economic challenge. Domestic demand is saddled by high precautionary saving rates and low confidence in the private sector. Beijing’s desire for export-led growth is also under pressure from the intensifying trade war with the US. The latest measures are poorly targeted for these problems, and may largely be a cosmetic effort to hit Beijing’s annual 5 per cent economic growth target.

What China needs is a targeted fiscal stimulus to raise demand and beat deflationary pressures. Households, particularly the poorest, need a boost. That means raising social security and healthcare support to ease the financial worries that encourage saving. Incentives to buy up unsold housing inventory and for business investment would help too. Then, to unleash the animal spirits of China’s investors and entrepreneurs, policy stability and deregulation is necessary. All this requires Beijing to overcome its hesitance to spend big and its desire to control the private sector.

The stimulus is, at least, a step in the right direction. It is a sign that Chinese officials are waking up to the urgent need to re-energise its economy. But turning China’s slump around will require more money, a more focused policy response and an end to the rhetoric that has hurt investor and consumer confidence alike.