China Research

Without doubt, the People’s Bank of China (PBoC) has been very active with its fresh attempt to stimulate the sluggish economy. However, monetary policy should not be regarded as the main tool to revive growth – not fiscal policy either. Instead, far-reaching structural reforms are badly needed in China to restore confidence of consumers and investors. Monetary policy alone is not strong enough to sizeably create new consumer confidence.

Largest stimulus package since the bad days of covid-19

The latest monetary stimulus package by the PBoCindicates clearly that China’s political leadership has become increasingly concerned about the (gloomy) outlook for the economy which is partly linked to the highly burdened real estate sector as well. Different measures to reduce borrowing costswere introduced. For example, the People’s Bank of China cut interest rates on existing mortgages and created new lending capacity by reducing cash requirements for banks. The PBoC also announced that the necessary deposit for buying a second home will be lowered from 25% to 15%, and that restrictions on borrowing for investments in stockswill be easened.

Usually, I consider increasing Chinese worries about the economic development already after reliefs of cash requirements only. This time, instead, a whole package of monetary easening was introduced. This should probably be interpreted as further growing political leadership worries aboutthe chances of meeting the 5% GDP-growth target for 2024. 

Sure, one may wonder about the real size of these political leadership worries when reading on the same day of the announcement of the stimulus package that “in general, the national economy maintained stability while making steady progress in August. Production and demand sustained a recovery, and employment and prices remained stable” (see here about the economic data in August https://www.chinadaily.com.cn/a/202409/24/WS66f1ee40a3103711928a9532.html). Real official belief in the above-mentioned economic analysis for August would not have made the recent central bank measures necessary…

Will the stimulus package help?

The answer to the question above seems to be obvious – no or not enough. Some possible – but certainly limited – relief on the real estate market cannot function as a real growth stimulator when relating to all the structural imbalances in the Chinese economy. There are bad bank loans, largely indebted municipalities and provinces, high implicit state-government debt, unprofitable state-owned companies, subsidized pricing in many areas, insufficient competition, tensions with important trading partner countries, all the institutional shortcomings, the influence of the almighty CP on the whole Chinese economy, etc.

Conclusion: The absence of urging structural reforms in many imbalanced areas of the Chinese economy and society hardly can enable uncertain consumers to raise their mood visibly with following GDP-improving effects. Central bank measures cannot do the job alone – not either this time. At least not when it comes to GDP in reality.

Hubert Fromlet