Does the new stimulus represent a turning point for China’s economy? Through Investing.com
Investing.com – China’s latest economic stimulus package, unveiled in September 2024, has sparked debate over whether it could signal a turnaround in the country’s economic slowdown.
This “cocktail of austerity,” as it has been described, includes a combination of rate cuts, reductions in housing costs, and liquidity injections aimed at stabilizing financial markets.
Despite the broad reach of this program, BCA Research analysts believe that these measures are not enough to drive a meaningful recovery, as deep structural challenges remain unresolved.
At the heart of this new stimulus are five major components. First, the People’s Bank of China announced a 50 basis point reduction in the Reserve Requirement Ratio of banks, aimed at improving liquidity in the financial system.
This was accompanied by a 20 basis point reduction in the 7-day repo rate, which is expected to reduce borrowing costs through a reduction in the Minimum Lending Rate and Average Borrowing Term.
Additionally, mortgage rates were also reduced by 50 basis points, and lower down payment requirements for second home purchases to encourage activity in the housing market.
In addition, the PBoC launched a support package of 800 billion RMB to provide financing for the purchase of shares of securities firms and listed companies, which is intended to support the stock market.
Finally, additional funding was extended to government agencies to convert unsold residential properties into affordable rental housing in an effort to ease pressure on the property sector.
Despite these measures, BCA Research remains skeptical about their ability to stimulate the wider economy. For example, while the reduction in mortgage rates may bring relief to some households, the aggregate savings it will generate—about RMB 150 billion per year—represents only a 0.3% increase in personal consumption.
This is too small to meaningfully change the trajectory of consumer spending. More importantly, the labor market is under severe stress, with deteriorating job prospects and stagnant wages hampering any possible recovery in household consumption.
Without strong employment growth, any increase in low borrowing costs is likely to be very small.
Similarly, while the RRR cut may increase bank liquidity, the real problem facing China’s economy is weak demand for loans.
With the prime lending rate still hovering around 5% and inflationary pressures continuing, even a cut in borrowing costs is unlikely to stimulate new credit demand.
Households and businesses remain hesitant to borrow, especially as property prices fall and put a damper on consumer confidence. The property market, a key driver of China’s recent growth, continues to struggle, with downward pressure on prices likely to continue.
Beyond the financial system, local governments remain constrained in their ability to promote growth. Anti-corruption investigations have increased in recent years, leading to heightened alarm among local officials, many of whom are reluctant to launch new infrastructure projects or take on more debt.
This reluctance has prevented one of the most common methods of economic growth, as local government spending has historically played an important role in stimulating employment, especially during times of inflation.
BCA analysts argue that China’s dire situation—a combination of declining credit and what they describe as a “balance sheet recession”—requires more aggressive interventions than the announced measures.
What the economy really needs, they suggest, is massive deflation targeting the housing market and a transfer of capital to households to boost confidence and spending power.
The latest update package, however, remains patchy and unlikely to address these deep issues. Without broad fiscal policies, the economy is unlikely to deliver significant recovery in the near term.
For investors, the outlook remains cautious. The stimulus may provide short-term support to the stock market, particularly China’s offshore stocks, which BCA has developed into a major overweight among global and emerging market portfolios.
However, broader global market conditions could dampen the upside, especially in the face of rising country risks and a possible slowdown in global trade.
Therefore, although Chinese A shares may offer some opportunities, the BCA advises a more neutral stance on Chinese offshore stocks and recommends against taking large positions in Chinese stocks for full-return investors, especially when global markets enter a risk reduction phase.
