China’s recent economic stimulus measures have sparked optimism on Wall Street, but experts warn they may fall short of addressing the country’s deep-seated economic challenges. The People’s Bank of China announced plans to inject 800 billion yuan (approximately $114 billion) into the stock market and implement policies aimed at boosting lending and easing restrictions on property purchases. These announcements triggered a surge in Chinese stocks, with the Golden Dragon index of Nasdaq-traded Chinese companies rallying 9%.
However, analysts caution that these measures are unlikely to resolve China’s fundamental economic issues. The country is grappling with weak consumer demand and a struggling property market, which accounts for 70% of Chinese household wealth. Housing prices in major cities have plummeted by up to 30% since their 2021 peak, according to Société Genéralé. This decline has not only impacted homeowners but also local governments that relied on land sales for funding.
The Chinese economy is showing signs of deflation, with consumer price inflation rising just 0.3% in August compared to the previous year, the lowest growth in three years. This economic slowdown has led to cautious consumer spending and a reluctance to take on new debt. China Beige Book reports that business borrowing has remained stagnant since the pandemic lows of 2021.
Michael Pettis, a finance professor at Peking University, argues that the new measures are primarily supply-side oriented and may not effectively address the demand problem. He suggests that these policies could potentially boost China’s trade surplus rather than stimulate overall GDP growth.
Experts point out that direct stimulus to households would be the most effective way to spur demand in a deflationary environment. However, President Xi Jinping, influenced by the economic theories of Friedrich Hayek, is ideologically opposed to such measures. This stance presents a significant obstacle to implementing more aggressive stimulus policies.
Comparisons to past economic interventions highlight the relatively modest scale of the current stimulus package. Previous efforts, such as the 7.6 trillion yuan injection in 2009 during the global financial crisis, dwarf the current measures. The accumulation of debt from these past interventions now constrains the government’s ability to implement large-scale stimulus without exacerbating existing financial imbalances.
Xi’s focus on developing frontier technologies and boosting exports as a means of economic growth faces challenges, including trade conflicts with the United States and European Union. These new income streams have yet to materialize and will likely take time to develop.
The current economic measures are viewed by some as a temporary reprieve for markets rather than a comprehensive solution to China’s structural economic problems. The property market’s overbuilding and high debt levels require a more substantial intervention than what has been proposed. Goldman Sachs estimates that returning China’s apartment inventory to 2018 levels would necessitate 7.7 trillion yuan, far exceeding the scope of the announced measures.
As China navigates these economic challenges, the effectiveness of its stimulus efforts remains uncertain. The government faces the delicate task of addressing immediate economic concerns while avoiding actions that could further inflate existing bubbles or lead to uncontrolled market corrections. For now, the announced measures offer a brief respite from negative economic news, but they may not provide the long-term solutions needed to revitalize China’s economy and restore robust growth.