Beijing made a dramatic gesture in September, implicitly admitting that the May stimulus package failed to help China’s beleaguered economy. It has advanced both monetary and fiscal stimulus measures far beyond anything to date. These steps may help Beijing meet its 5 percent real growth target for 2024, but they are not likely to restore China’s economic momentum.
On the fiscal side, Beijing plans to issue some 2 trillion yuan (about $285 billion) in additional sovereign debt. It has earmarked half this amount to help already heavily indebted local governments cope. The other half will go to a number of support programs for individuals and families.
Part of the scheme will offer what Beijing calls “living allowances” to the poor, ostensibly to celebrate Oct. 1’s 75th anniversary of communist rule. No doubt, recipients will spend these monies quickly and provide an immediate fillip to economic activity. This measure, however, can have little lasting effect.
Beijing will also offer an ongoing monthly allowance of 800 yuan (about $114) for each child in families with two or more children. This will have a more lasting effect on economic activity, although there are few such families in China these days. No doubt, this measure also aims to encourage births and thereby counteract the demographic pressure imposed on the economy by years of low fertility rates, although it will be 15 to 20 years before any rise in births today can influence China’s workforce.
Separately, the city of Shanghai will offer 500 million yuan in vouchers for people to use for dining and amusement. At less than 1 percent of Shanghai’s gross domestic product, this measure will hardly have much effect. Beijing has also earmarked 1 trillion yuan to recapitalize six big banks, clearly in an effort to remedy the harm done by the failures brought on by the property crisis.
On the monetary side of the ledger, People’s Bank of China (PBOC) Gov. Pan Gongsheng has outlined several steps. The central bank will cut the one-year medium-term lending facility rate to 2 percent from 2.3 percent at present. It will cut the bank’s main policy tool, the seven-day reverse purchase rate, to 1.5 percent from 1.7 percent. These changes look tiny compared with the latest Federal Reserve move in the United States to cut its main lending rate by half a percentage point, but by the standards of past PBOC measures, the recent cuts look pretty bold indeed.
To stimulate lending and presumably economic activity further, the PBOC will reduce the amount of cash that banks must hold in reserve against their deposit and loan portfolios. To lift China’s falling stock market, the PBOC will also make 500 billion yuan available for lending to investment funds, brokers, and insurers. It will make an additional 300 billion yuan available to finance share buybacks by listed companies.
The bank’s hope, no doubt, is that a rising stock market will offset some of the household wealth lost to the property crisis and its depressing effect on real estate values. To help real estate directly, the PBOC will cut the rates payable on existing mortgages, a relief for existing homeowners, since unlike the Americans, the Chinese have no facility to refinance their mortgage. To increase homebuying, the bank has also scheduled a drop in the required down payment on second homes to 15 percent from 25 percent at present.
The list of measures—both fiscal and monetary—is long and sounds impressive, but it will likely fail to do the trick. More than measures to make credit cheaper and more plentiful or to help certain of society’s needier demographics, Beijing needs to restore confidence among the vast population of Chinese consumers. It also needs to encourage private businesses, which are estimated to account for some 60 percent of the economy and 80 percent of new urban employment.
Chinese consumers are unwilling to spend. At last measure, the country’s consumer confidence index was down by about 3 percent from last spring and down by almost 30 percent from 2022. To some extent, this sorry state of affairs reflects the lingering effects of the zero-COVID-19 measures that stopped economic activity and interrupted employment and paychecks long after the COVID-19 pandemic ended. More than this is the effect of the property crisis on real estate values. No pickup in the stock market can repair this burden. A household’s home in China constitutes the bulk of the family’s net worth, and real estate prices have fallen by more than 12 percent since 2021, when the property crisis first broke.
At the same time, private business owners and managers have slowed their capital spending on expansion, modernization, and hiring to a negligible amount. Fixed capital formation has actually declined in the past year. Accustomed to the rapid growth of earlier years, China’s private business owners have been shocked by the slowdown of the past couple of years. They can also remember how, not too many years ago, Chinese leader Xi Jinping chastised private businesses for caring more about profits than the Communist Party’s agenda. Xi has changed his tune of late, but memories are long and they have left doubts about Beijing’s attitude in future years.
Until Beijing can find a way to restore confidence in these two crucial sectors of the nation’s economy, growth will continue to struggle. It is doubtful that China will deliver the targeted 5 percent real growth for 2024. If Beijing can make a positive announcement on this front, it will more likely come from statistical legerdemain than from genuine economic activity. Beijing has hinted at more stimulus to come. Perhaps these next actions can address the confidence problem. Without help on this front, the economy will continue in its weakened state.
