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Stimulus packages have sparked a stock market rally, but economists aren’t sure they can solve deeper problems
As China celebrates Golden Week and prepares to mark the 75th anniversary of the founding of the People’s Republic, the ruling Communist Party has launched a number of policies aimed at boosting the sluggish economy.
The plan included support for the country’s crisis-hit real estate industry, support for the stock market, cash transfers to the poor and increased government spending.
After the announcement, stock prices in mainland China and Hong Kong posted record increases.
But economists warn that such policies may not be enough to solve China’s economic problems.
Some of the new measures announced by the People’s Bank of China (PBOC) on September 24 were directly aimed at the country’s depressed stock market.
The new tools include 800 billion yuan ($114 billion, £85.6 billion) worth of funds that insurers, brokers and asset managers can borrow to buy shares.
Pan Gongsheng, president of the People’s Bank of China, also announced plans to lower borrowing costs and allow banks to increase lending, saying the central bank would provide support to listed companies that wish to buy back their own shares.
Just two days after the People’s Bank of China’s announcement, Xi Jinping chaired a surprise economic-focused meeting of the country’s top leaders, known as the Politburo.
Officials promised to step up government spending aimed at supporting the economy.
The benchmark Shanghai Composite Index rose more than 8% on Monday, the day before China began a week-long holiday, its best day since the 2008 global financial crisis. The move capped a five-day bull run in which the index rose 20%.
The next day, Hong Kong’s Hang Seng rose more than 6% as mainland markets were closed.
“Investors loved the announcement,” said China analyst Bill Bishop.
Investors may be uncorking the champagne, but Mr. Xi has deeper problems to address.
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President Xi Jinping celebrated the 75th anniversary of the founding of the People’s Republic of China
The People’s Republic’s 75th anniversary means it has existed longer than the only other major communist state, the Soviet Union, which collapsed 74 years after its founding.
“Averting the fate of the Soviet Union has long been a key concern for Chinese leaders,” said Alfred Wu, an associate professor at Singapore’s Lee Kuan Yew School of Public Policy.
The top priority for government officials will be to boost confidence in the economy as a whole amid growing concerns that the economy will miss its 5% annual growth target.
“In China, we have to achieve our goals by any means necessary,” said Yuen Yuan Ang, a professor of political economy at Johns Hopkins University.
“Leaders are concerned that failure to meet the target in 2024 will worsen the downward spiral of slowing growth and declining confidence.”
One of the main drags on the world’s second-largest economy is the downturn in the country’s real estate market, which began three years ago.
Apart from policies aimed at boosting stock prices, recently announced stimulus packages also target the real estate industry.
It includes measures such as expanding bank lending, lowering mortgage interest rates, and lowering the minimum down payment for second-home buyers.
However, there is skepticism about whether these moves will be enough to boost the housing market.
“While these steps are welcome, they are unlikely to make a big difference on their own,” said Harry Murphy Crews, an economist at Moody’s Analytics.
“China’s weakness stems from a crisis of trust, not a crisis of credit. Businesses and families are unwilling to borrow, no matter how cheap it is.”
At the Politburo meeting, leaders vowed to go beyond interest rate cuts and leverage government funds to boost economic growth.
But officials gave few details about the size or scope of government spending beyond setting priorities such as stabilizing the real estate market, supporting consumption and boosting employment.
“Investors could be disappointed if fiscal stimulus falls short of market expectations,” Qian Wang, chief economist for Asia Pacific at Vanguard, warned.
“Furthermore, cyclical policy stimulus will not solve structural problems,” Wang said, suggesting that without deeper reforms, the problems facing China’s economy will not be resolved.
Economists say addressing the real estate market’s deep problems is key to rebuilding the entire economy.
Real estate is the largest investment most families make, and falling house prices are contributing to the erosion of consumer confidence.
“Ensuring delivery of sold but unfinished homes will be key,” Julius Baer economist Sophie Altermatt said in a note.
“In order to increase domestic consumption on a sustainable basis, fiscal support for household incomes needs to be delivered not through one-off transfers, but rather through improvements to pension and social security systems.”
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Evergrande, one of China’s largest real estate developers, went into liquidation in January.
On the day of the 75th anniversary, an editorial in the state-run newspaper People’s Daily struck an optimistic tone, stating, “Although the road ahead remains difficult, the future is bright.”
According to the article, concepts such as “quality development” and “new productive capacity” introduced by President Xi are the keys to paving the way to a better future.
This emphasis on ideas reflects Xi Jinping’s desire to shift away from the rapid growth drivers of the past, such as real estate and infrastructure investment, while aiming to develop a more balanced economy based on luxury industries. .
The challenge China faces, An said, is that “the old economy and the new economy are deeply intertwined. The rapid decline of the old economy will inevitably hinder the rise of the new economy.”
“This is what the leadership recognizes and is responding to.”
