ANALYSIS: The Chinese Economy in Survival Mode

China's Finance Minister Lan Fo'an (C) speaks next to Vice Minister of Finance Wang Dongwei (2nd-L), Vice Minister of Finance Liao Min (2nd-R) and Vice Minister of Finance Guo Tingting (R) during a press conference in Beijing, on Oct. 12, 2024. Adek Berry/AFP via Getty Images

News Analysis

After announcing an injection of about 2 trillion yuan ($283 billion) into China’s ailing economy in late September, Beijing has kept the world waiting for a significant spending package as a follow-up to the huge monetary stimulus.

However, at high-profile press conferences on Oct. 8 and Oct. 12, senior leaders discussed an upcoming fiscal stimulus extensively, but stopped short of specifying details. 

As the market anticipated an accompanying fiscal policy to stimulate spending, experts pondered the necessary scale.

Prominent economists in China, including Jia Kang, dean of China Academy of New Supply-side Economics and a former Ministry of Finance official, and Liu Shijin, a former senior State Council official, told Chinese media the number would need to be 10 trillion yuan ($1.42 trillion), or about 8 percent of China’s 2023 gross domestic product (GDP).

On Oct. 11, Yu Yongding, a prominent Chinese economist involved in policymaking, said Chinese institutions have floated various amounts to achieve the 5 percent growth target, ranging from 8 trillion to over 10 trillion yuan. Yu’s own estimate is over 10 trillion.

Daniel Rosen, founding partner of Rhodium Group, a leading research firm on the Chinese economy, explained the needed stimulus size further at a think tank event in Washington on Oct. 9.  

If China needs a stimulus of over 6 trillion yuan to meet the growth target, “that means they are growing zero percent this year,” he said.

Some experts have gone further. They say it’s time to view China’s economy through the lens of survival rather than growth.

“The Chinese economy is not seeking growth anymore; it’s seeking survival. Therefore, stop looking at it the old way: ‘The growth rate used to be 10 percent, then 8, and now 5,’” Mike Sun, a U.S.-based businessman with decades of experience advising foreign investors and traders in China, told The Epoch Times.  

“That’s meaningless, not to mention that China’s numbers are falsified.” Sun uses an alias to protect himself from retaliation from the Chinese Communist Party (CCP).

Christopher Balding, an expert at the Henry Jackson Society, a UK-based think tank, agreed that survival is an “appropriate” description of the current Chinese economy.

“What we have is a cancer patient who probably can live for quite some time, but he’s going to be sick, and correcting that will require significant intervention and pain, something like chemotherapy,” Balding said.

Stimulus or Patchwork?

The Chinese economic slump became apparent to the world when the Chinese economy failed to recover after the end of the zero-COVID lockdown policy in December 2022.

Deflationary pressure persisted, although the consumer price index returned to a slight year-on-year increase in July and August. Retail sales remained sluggish. September data showed the country’s manufacturing sector contracting for a fifth month.

Since last year, analysts have been calling for a big stimulus package to increase consumer spending and revive China’s economy. The market consensus is that China needs to transform from its previously investment-led and debt-fueled model to a consumption-led model if it is to continue its growth.

A woman walks past the headquarters of the People's Bank of China, the country's central bank, in Beijing on July 9, 2024. Adek Berry/AFP via Getty Images

China has resisted rolling out a significant stimulus package. However, on Sept. 24, in what the regime called “combo punches,” China’s central bank said it was lowering the banks’ reserve requirement ratio (RRR) by 50 basis points, which would free up about 1 trillion yuan (about $142 billion) for new lending.

The People’s Bank of China (PBOC) announced that it would cut short-term borrowing rates by 20 basis points, effective Sept. 27.

Balding questions whether the policy packages are stimulus; China made similar moves last year, just not on the same day. In 2023, the PBOC reduced RRR twice and released 1 trillion yuan. In both 2023 and 2022, the PBOC cut short-term borrowing rates twice.

He added the scale was very small—2 trillion yuan is less than 2 percent of China’s GDP.

China’s decision to recapitalize commercial banks was a new move, the first time it has done so since 2008.

On Sept. 24, Li Yunze, minister of the National Financial Regulatory Administration, said China would inject core tier 1 capital—reserves banks hold to run their daily operations and cover potential losses—at six major commercial banks. Li didn’t reveal more details.

“That’s making sure that the banks don’t collapse so that the big banks can buy smaller banks on the verge of collapse. So you’re not really stimulating anything. You’re just patching it up,” said Balding.

“It’s patching up the old issues, not necessarily doing new stimulus.”

People arrive at Nanjing railway station after the National Day holidays in Nanjing, in eastern China's Jiangsu province, on Oct. 7, 2024. STRINGER/AFP via Getty Images

Curbing Economic Deterioration

The package announced on Sept. 24 also included reducing interest rates on existing mortgages by an average of 0.5 percent, or around 150 billion yuan (about $21 billion), to provide relief to some 50 million households. Home minimum down payments will also be lowered from 25 percent to 15 percent for second-home buyers.

Nonetheless, most international banks are still watching and haven’t increased their outlook for China’s GDP growth this year.

According to J.P. Morgan, the latest move indicates that China has changed its piecemeal approach to addressing its ailing economy, though the effectiveness of the new measures remains to be seen, mainly due to the lack of specifics in the regime’s announcements.

According to David Huang, a U.S.-based economist familiar with the Chinese economic situation, many analysts thought Beijing rolled out the “combo punches” out of concerns about meeting its 5 percent growth target. 

However, in his view, the motivation went beyond economic pragmatics: the CCP is worried about the political consequences of China’s rapid economic deterioration, he said. 

“The current economic downturn has threatened the CCP’s political security, especially its potential to dominate Asia and change the international order,” he told The Epoch Times. “Therefore, the Party had to act.”

China’s housing market, which accounts for about a quarter of the country’s GDP, has been in a downward spiral for years.

According to the China Real Estate Industry Association, one in five homeowners in Beijing, a tier 1 market, saw the price of their home drop by over 30 percent.

Given that Chinese commercial banks lend mortgages based on 70 percent of a home’s value, they take losses when the collateral’s value drops under the loan amount.

Chiou Jiunn-Rong, an economics professor at Taiwan’s National Central University, doesn’t believe saving the property market is the priority of Chinese communist leader Xi Jinping.

“China’s real estate market is very challenging to rescue,” Chiou told The Epoch Times. “The rapid decline of the real estate market will impact China’s banks, erode the rest of the financial system, and morph into a financial crisis. The new measures the regime introduced are merely delaying the housing market’s deterioration.”

Sun agrees. He thinks the CCP chose to boost the stock market first, because although the property market can’t be revived overnight, China’s policy-driven stock markets could instantly show an artificial bull market.

Workers on scaffolding at a highway bridge construction site in Shaoyang, in central China's Hunan province, on July 7, 2024. STR/AFP via Getty Images

Buying Time

The surprise “combo punches” on Sept. 24 also included an 800 billion yuan (about $114 billion) package for funds, insurers, brokers, and listed companies to borrow more money to invest in the stock market by leveraging on their existing equity holdings.

Immediately, the CSI 300 index—blue-chip stocks traded in Shanghai or Shenzhen—increased by over 25 percent from Sept. 24 to 30, the biggest one-week gain in nearly 20 years.

As the nation returned from a week-long vacation, anticipation was high for a policy package of a similar scale to stimulate spending.

However, investors were disappointed.

Instead of another 2 trillion yuan, China announced a tenth of that number. At a press conference on Oct. 8, the nation’s top economic planner said it would advance 200 billion yuan ($28 billion) of investment and construction projects in its 2025 budget, which will start before the end of the year.

The National Development and Reform Commission (NDRC) discussed a pending stimulus package extensively at the press conference, but there were no specifics beyond frontloading 200 billion yuan from the 2025 budget.

In reaction, the Shanghai and Shenzhen stock markets dropped by about 5 percent in a single day, and Hong Kong’s Heng Seng Index fell by 8.5 percent.

The public relations blitz continued at another press conference on Saturday, Oct. 12. China’s Ministry of Finance again mentioned a pending stimulus package to “significantly” increase spending—without disclosing any details.

Sun thinks the CCP intends the new policies to be unpredictable, in order to keep attracting capital into the stock market. The unpredictability would make it difficult for investors to time their exit without risking a potential loss, he added.

Xi is widely expected to continue his industrial policy of developing advanced manufacturing, which hasn’t been able to lead economic growth by compensating for the housing market’s decline.

In Sun’s view, by rescuing the property and financial markets, Xi is buying time, because digging China out of its current economic hole may take years or decades.

“When a person’s life is threatened, save it first,“ he said. ”Think about how to recover next.”

Xing Ning, Catherine Yang, and Bin Zhao contributed to this report.