China’s relentless economic growth was once a wonder of the world. Oh, what a memory.
Over the past few years, China has struggled with an economic slowdown amid collisions crisesmany of which make it unique on a world scale. Consumer prices are coming deflationary There is an oversupply of housing in the territory and youth unemployment he rose.
The mounting pressure forced the Chinese government to step in. Over the past month, Beijing has proposed a set of significant economic stimulus measures aimed toward reviving China’s flagging economy.
According to Deutsche Bank research notethis stimulus could potentially develop into the “largest ever” in nominal terms. But there’s still quite a bit we do not know. So what measures are on this package to this point, and has China been here before?
What’s in the package?
On September 24, Mr. Gongsheng, Governor of the Central Bank of China, unveiled the Central Bank of China the bravest intervention to stimulate its economy since the pandemic.
Initiatives included lowering mortgage rates on existing homes and reducing the amount of money business banks must hold in reserves. The latter is predicted to pump about 1 trillion yuan (S$210 billion) into the financial market, enabling banks to lend more.
Charles Bowman/Shutterstock
Additionally, it was announced that 800 billion yuan (S$168 billion) had been allocated to strengthen China’s capital market.
This included a brand new 500 billion yuan (S$105 billion) monetary policy instrument to help institutions more easily access funds for share purchases and 300 billion yuan (S$63 billion) possibility of renting again to speed up the sale of unsold apartments.
Further signs of economic recovery became visible, including: Politburo meeting top Chinese government officials, two days after the announcement.
Chinese President Xi Jinping has stressed the urgency of economic recovery. Xi even encouraged officials to “boldly help the economy” without fear of consequences.
On the same day, seven government departments were laid off common political package stabilize China’s 500 billion yuan (S$105 billion) dairy industry, which is severely impacted by falling milk and beef prices from 2023.
Trade fair rollercoaster
Initially, the market response was overwhelmingly positive. Perhaps too positive. In the last week of September, stock exchanges in Shanghai, Shenzhen and Hong Kong recorded gains biggest weekly increase in 16 years.
On October 8, after the national holiday in China, the turnover on the stock exchanges in Shanghai and Shenzhen reached unprecedented levels 3.43 trillion yuan (AU$718 billion). However, expectations for further stimulus measures were met with disappointment.
China National Development and Reform Commission moved forward 100 billion yuan (S$21 billion) in spending in the 2025 budget. This was not enough to maintain market optimism. On October 9, Chinese stocks saw their decline the hardest fall in 27 years.
This downturn only worsened a couple of days later when China’s Ministry of Finance suggested that “large room” on debt, but didn’t specify any latest stimulus measures.
Andy Wong/AP
We still don’t listen to the details
The market stays deeply uncertain about the future direction of China’s economic policy and what it might mean for the world. Hopes were high that more details could be revealed over the weekend intermittent.
Chinese authorities confirmed this in July at the third plenary session announcement that China “must remain strongly committed” to achieving this 12 months’s economic growth goal of 5%. Compared to the country economic performance in the reform erait’s a modest goal.
But in the face of persistently weak economic prospects, Xi later appeared to subtly change his tone, changing the language in September from “remain unwavering commitment” to “strive for fulfillment.”
Over the past a long time, China has often used massive stimulus measures to revive its economy in periods of economic downturn. These policies were able to significantly rejuvenate the economy, although they generally had some disturbing negative effects.
In response to the global financial crisis in 2008, the State Council of China published a document entitled 4 trillion yuan (A$837 billion) stimulus package. This helped China weather the crisis and was considered a key stabilizer of the global economy.
But it has also collected trillions of yuan of debt local government financing and accelerated the developmentshadow banking” – unregulated financial activities.
China also spent heavily to stimulate its economy in 2015 after stock market turmoil and nonetheless after the pandemic.
Shan on/AP
What should we expect?
What should we expect this time? How sustainable and sustainable will further growth be?
We are still waiting on many details about the size and scope of the package, but any large increase in Chinese economic demand is probably going to have spillover effects.
As we’ve got already mentioned, many of the measures announced to this point could have the most direct impact on borrowing, lending and liquidity on China’s stock exchanges.
This suggests that we must always listen to the so-calledwealth effect“in economics. This is the theory that rising asset prices – comparable to housing or stocks – make people feel richer and subsequently spend more.
If China’s large stimulus spending ends in a sustained increase in asset values, it could spark economic optimism. Chinese consumers – and investors – can stop worrying about the future.
From Australia’s perspective, this might mean a rise in demand in the areas where our economies are situated related – iron ore, tourism, education and industrial food exports.
More broadly, Chinese demand could drive growth in other global economies, which might have a self-reinforcing effect on the world as a complete.
Andy Wong/AP
Beware of financialization
On the other hand, China’s increased reliance on volatile asset price increases in capital markets to sustain growth could have destabilizing effects. Where asset price increases profit the ‘top-tier city’, they can themselves create inequality and imbalance.
China”Black Monday” the 2015 stock market crash set off alarm in Beijing. Partly reflecting caution against excessive financialization, Xi warned at the moment that “the apartment is for living, not for speculation.”
For now, China continues to pursue a path towards a more sustainable development model, striving to strike a balance between maintaining economic growth and stabilizing domestic markets and the political landscape. As for the end result, it stays deeply uncertain for all of us – perhaps including China itself.
