China's Economic Revival: A Sinking Ship or a Course Correction?

By TMC Research Staff | The Milwaukee Company | tmcresearch@themilwaukeecompany.com

China's economic engine appears to be sputtering, and Beijing’s response has been both decisive and revealing. In an attempt to arrest the country's downward trajectory, the People's Bank of China (PBOC) recently rolled out a suite of measures designed to reinvigorate growth and restore confidence in the domestic stock market. Adding to these efforts, last Thursday, the Chinese Politburo and President Xi Jinping indicated that fiscal stimulus is on the way, signaling a significant shift in Beijing's approach to the economic challenges it faces.

The scale of the intervention suggests mounting concern in Beijing, as the world’s second-largest economy grapples with a number of challenges, including a persistent real estate crisis, weak consumer spending, and stagnant inflation.

The PBOC’s strategy, unveiled last Tuesday, involves a series of interest rate cuts, reductions in mortgage payments, and adjustments to the capital requirements of banks—moves meant to encourage lending and stimulate investment. Additionally, the central bank has announced a 500 billion yuan (around $70 billion) injection to boost stock purchases by funds, brokers, and insurers, coupled with a 300 billion yuan provision for corporate share buybacks. The goal: to resuscitate a market that has, thus far, defied the optimism these moves attempt to stoke.

The immediate market response appeared positive. The CSI 300 Index—China's broad stock market benchmark—surged 14%, while Hong Kong's Hang Seng Index rose by 11%, as of September 27, 2024. However, these gains mask deeper issues. The CSI 300 value has plummeted by nearly a third since its peak three years ago. The roots of this decline run deep: economic stagnation, a massive real estate downturn, and a broader loss of confidence in China's long-vaunted growth model.

A Shift Towards Fiscal Support

The announcement from the Chinese Politburo and Xi Jinping marks a significant development. While monetary policy adjustments have been the primary tool used so far, the indication of forthcoming fiscal stimulus suggests that Beijing recognizes the limitations of monetary policy alone in addressing the structural issues plaguing the economy.

Many economists have argued that without stronger government spending, monetary measures may lack the firepower to pull the economy out of its rut. The proposed fiscal stimulus could include increased infrastructure investment, greater freedom for local governments to spend, and initiatives to boost consumption—steps that many analysts believe are necessary for a sustained recovery.

“The government is finally coming to terms with the grim situation the economy is in,” commented Eswar Prasad, a trade policy expert from Cornell University. The anticipated fiscal measures could help rebuild consumer and business confidence, which remain at historic lows. Households and firms, battered by a real estate crisis that has wiped out $18 trillion in wealth since 2021, seem reluctant to borrow or spend, despite record-low borrowing costs.

Structural Challenges Remain

Despite these policy shifts, underlying issues persist. The fundamental problem for China lies in its property market, widely acknowledged as the backbone of its economic boom for decades. Now, that same market has become a liability, with unsold homes littering cities and household wealth evaporating as property values nosedive. (At TMC Research, we wrote about China’s increasingly troubled debt situation fueled by the property bubble back in July.) Instead of propping up demand through further rate cuts, some commentators suggest that China may need to take a bolder approach. They argue that allowing prices to fall further and taking decisive action to clear the vast backlog of unfinished homes may be critical to reviving confidence in the market—and, by extension, consumer spending.

In addition to the real estate crisis, China's demographic challenges are intensifying its economic difficulties. The aging workforce is leading to a shrinking labor pool, putting pressure on the country's productivity and increasing the burden on social welfare systems. As the population ages, fewer young workers are available to support the economy, potentially prolonging the slowdown in economic growth over the long term.

Compounding this issue is the "lying flat" movement, which appears to be gaining traction among China’s youth. Disillusioned by intense work pressures and limited opportunities for upward mobility, many young Chinese are opting out of the rat race in favor of a minimalist lifestyle with minimal employment. This trend could reduce both consumer spending and labor participation, further dampening economic activity and challenging traditional growth models reliant on a robust workforce.

The Malaise Continues

The malaise is evident in China’s economic figures. Growth is flagging, with major investment banks revising their projections for the year downward, some now expecting growth to fall below Beijing’s target of 5%. While the latest data on inflation and employment has been bleak, the central government had, until recently, refrained from any sweeping fiscal policy moves. Instead, Beijing had focused on monetary adjustments, as seen in the latest cuts to mortgage rates and down payments for second homes.

However, the recent indication of fiscal stimulus from the highest levels of government may signal a new phase in China's economic policy. If implemented effectively, these measures could provide the much-needed boost to public spending and drive consumer demand.

The Wider Global Context

China's challenges are unfolding against the backdrop of a rapidly shifting global economic landscape. The U.S. Federal Reserve, after battling inflation with a series of rate hikes, has recently pivoted, cutting interest rates by 50 basis points in what appears to be an effort to support the American labor market. This move may have brought some relief to China, as U.S. rates tend to strengthen the dollar, diverting capital away from emerging markets. The Fed's easing has opened the door for China to follow suit, without the immediate fear of capital flight. “The Fed cut has opened the door for monetary policy injection. The People’s Bank of China will likely ease more, and ease more frequently,” said Raymond Yeung, chief economist for Greater China at ANZ.

However, the broader question remains: Will these combined monetary and fiscal policy moves be enough to jolt China’s economy out of its doldrums? With households wary of taking on more debt and businesses hesitant to invest, China’s growth model, which has for years relied on vast quantities of cheap credit to fuel expansion, may need a structural rethink.

Many argue that relying solely on policy adjustments may not be sufficient to address the underlying issues. Structural reforms that tackle demographic challenges—such as policies to support the aging population and initiatives to re-engage the youth in the workforce—may be necessary. Without addressing these deep-rooted problems, China may find it increasingly difficult to revitalize its economy, underscoring the need for a total reassessment of its growth strategy.

The Road Ahead

For now, the PBOC’s moves, combined with the anticipated fiscal stimulus, are aimed at stabilizing the immediate situation. By allowing mortgage rates to fall, easing capital requirements for banks, and signaling increased government spending, the authorities hope to free up cash for lending and consumer spending. Yet, many analysts remain skeptical. While the measures are steps in the right direction, they may fall short of what’s required to bring about a sustained recovery.

What China needs, according to many experts, is a more aggressive and comprehensive approach. Without a broader stimulus package—one that boosts public spending, especially by local governments, and drives consumer demand—there is little hope for an economic resurgence. The property sector remains a significant drag on the economy, and until that is addressed meaningfully, China may struggle to return to its once-meteoric growth trajectory.

Beijing’s next moves will be crucial. If the government can muster the political will for a bolder fiscal response—perhaps through increased infrastructure investment, greater freedom for local governments to spend, and reforms to boost consumption—China’s economy may find a way back to solid growth. Until then, its current path appears fraught with uncertainty. The combined monetary and fiscal measures, while welcome, seem like a band-aid on an increasingly complex set of economic wounds.

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