As a powerhouse of global growth, China now faces a difficult balancing act as it seeks to maintain momentum amid mounting internal and external pressures. In response, the Chinese government and its policymakers are evaluating a large package of stimulus measures aimed at stabilizing the economy and addressing its pressing internal issues. The persistent growth of the second-largest world economy could be at stake depending on the execution of these unprecedented policies. The success of these measures will test the country’s ability to fix its core issues and adapt its growth model to the global landscape for the years to come. Following an overview of the context behind the stimulus and a discussion of the specific measures, this article will explore their expected impacts and consider alternative actions Chinese officials could have taken to address their core challenges.
China’s Economic Rise and Challenges
China began to reform and open up its economy around 1978, and since then the country’s GDP has grown at a steady rate of c.9% per year. It is the only economy to have sustained such high growth in this time period. Neither the EU nor the US has been able to replicate a similar level of sustained growth with 1.63% and 3.16% annual growth respectively. China's export-oriented manufacturing allowed for this sustained growth. Exports values have risen from $2,209 billion in 2013 to $3,380 billion among its 214 trade partners, of which the US, Hong Kong, and Japan make up around 30% of exports. Its heavy investments (more than 30% of its GDP) in infrastructure, healthcare, social welfare, and public services have also allowed people and goods to move across the country more quickly, resulting in a boost in international trade. Such advancements were made possible, amongst other reasons, through foreign direct investments (FDI) and state-owned enterprises (SOE), which have been crucial in allowing the fast-paced growth of the Chinese economy. With the help of Special Economic Zones to attract foreign investment (the first four being Shenzhen, Zhuhai, Shantou, and Xiamen) China has been able to accumulate FDI from a multitude of different countries with Hong Kong topping the chart, followed by Singapore, Japan and South Korea. Today, China boasts of being the second-largest economy (after the US). However, lately, it is facing issues on many of its fronts. These issues are amplified by a population with declining working age, lower returns on investments, and slowing productivity growth.
More recently, China’s ambitious 2024 GDP growth estimate of 5.0% seems difficult to be reached. China’s momentum has severely decelerated due to its issues in its real estate sector. The Chinese property sector crisis can be partly attributed to Evergrande’s collapse. The real estate giant, which was listed in 2018 as “the world’s most valuable real estate company” defaulted on its debts in December 2021. The repercussions of the companies’ failure to restructure the $300 billion it owed to investors have caused the dismay of over 1,300 projects in more than 28 cities and snowballed into an ever so weakening housing situation. In addition to this casualty, national property investment significantly decreased (-10.2%YoY), with major city home prices declining as well (-5.3%YoY) and new home sales dipping too (-26%YoY). Additionally, sluggish domestic demand has also posed a problem. China is responsible for around one-third of global production, but only one-tenth of global demand, partly due to the high savings rate (of around 44%) of Chinese. In comparison, Europe’s 2024 saving rate in the second quarter was 15.7%, while the US’s saving rate is as little as 4.6%. The sharp decline in consumer confidence coupled with the downturn in the housing market, predominantly accounts for the sharp slowdown in domestic spending, which in China contributes to 53-54% of its GDP. These issues have already lowered China’s growth projections to 4.8% for the year, compared to last year’s 5.2%, and have caused the government to take action.
Residential Property Prices for China, Index 2010 = 100 (Source: Federal Reserve Economic Data)
In the past, the Chinese government had taken action to resolve its internal issues, but its newest ‘bazooka stimulus’ could surpass all previous efforts. Most notably, China had emitted a fiscal package in 2008, which alleviated the impacts of the worldwide crisis, and allowed a growth of more than 9% from 2008-09. The package included great spending on infrastructure from provincial governments. A 4 trillion Yuan package was formally announced by the government primarily focused on infrastructure, which was unofficially estimated to be 12 trillion Yuan. In the short run, this stimulus had upsides as it prevented a slowdown in the economy, but in the long run, it was not as successful. This is because the easing in monetary policies, and boost in industrial sector tax cuts and incentives, all part of the stimulus, seemed to be leading to high levels of local government debt and overcapacity in certain industries, requiring further reforms in the following years. Alternatively, it had also intervened in 2015 when the Chinese stock market faced turbulence due to the burst of a bubble. This bubble was a cause of state-owned media encouragement for retail investors to pour money into the stock market that was then amplified with shadow banking and margin trading. To prop up stock prices, after the burst and consequent 30% decline in the value of most class-A shares, the government announced a series of policies and engaged The Asset Management Association of China to involve 57 mutual funds for a combined 2.16 billion yuan to stabilize the stock market. It also resorted to 6 interest rate cuts in 12 months.
However, policies that try to achieve a quick fix alone are not enough to address the underlying problems in the economy, a point stressed by Brock Silvers, MD at Kaiyuan Capital, in his statement: “Recent policies all seem to be treating the symptoms rather than the illness”. Finally, China also enacted a stimulus to combat the 2020 pandemic which encompassed: fee cuts and tax rebates, special purpose bonds, monetary policies, medium-term lending facilities and re-lending programs. Unlike the US, it avoided universal cash-in-hand measures instead utilizing its financial system to support the private sector, implementing preferential tax policies, and increasing government spending to indirectly support the real economy.
China’s Economic ‘Bazooka’: Bold Stimulus to Tackle Deflation and Property Woes
Following the persistent deflationary pressures, a struggling property sector and weak export demand, last September, the People’s Bank of China (PBC) implemented a suite of new heavy weighted policies including rate cuts, RRR reductions and mortgage policy relaxations. This monetary easing package is the biggest stimulus since the pandemic, and the most significant easing efforts since 2015, with the Chinese central bank using for the first time its own money to support the stock and real estate markets. The unprecedented package combines different maneuvers to cope with both missing official annual targets and a series of new export controls on China.
The monetary policy package consists of 7 measures, which can be grouped into three macro categories: lower interest rates and RRR for banks, changes in mortgage policies and stock market stabilization.
The first and most important move is the twenty basis points cut of the benchmark seven-day reverse repo rate from 1.7% to 1.5%. This is the usual mechanism implemented by the PBC to influence short term liquidity, and in this case to increase liquidity while influencing other rates in the banking system such as the one-year medium term lending facility (MLF) which will be lowered by 30 bps and the loan prime rate, down by 20-25 bps. These simultaneous but asymmetric cuts are designed to maintain a stable Net Interest Margin (NIM) for banks in order to let them provide credit support without significantly reducing their profitability.
Seven Day Repo Rate (Source: Factset)
Other than interest rate cuts, the PBC has directly acted on the banks’ required reserve ratios (RRR), lowering them by 50 basis points to 6.6% to reduce pressure on bank profitability, freeing up assets about 1 trillion yuan that are currently earning a low rate of return. However the move is mostly to help buoy sentiment and boost high quality borrowing demand, the cut itself is not expected to directly translate into stronger lending, as the liquidity injected by the RRR cut will be outpaced by the PBC’s repo operations.
In order to boost the real estate sector, supporting its emergence from the crisis, the package also includes significant changes to mortgage policies. First of all, the PBC has reduced the down payment ratio on the purchase of second homes from 25% to 15%, unifying it with that for first homes. The move is expected to have limited impact considering the downbeat sentiment. Secondly, the Chinese central bank has cut the mortgage rates by circa half a percentage point with the aim of narrowing the interest rate gap between new and existing mortgages. Despite the potential 150B yuan savings in interest payments for borrowers, the maneuver is regarded to have limited impact because the net transfer to the household sector will be offset by the planned reduction in deposit rates. Finally the PBC has improved the support for a 300 billion yuan fund set up in May available to local government – owned enterprises to buy unsold homes and convert them into subsidized housing.
For what regards stock market stabilization, the PBC has settled up two facilities. The first one is a 500B yuan fund to help brokers, insurance companies and funds to buy stocks via a swap line that will allow them to pledge their assets for high-quality assets. The second consists of a 300B yuan fund to support listed companies’ share buybacks at an interest rate of 1.75%. Both measures aim at both stock market stabilization and investment encouragement, that is key for overall economic confidence.
Anticipated Impact on Property and Market Confidence
China has aimed to stabilize its beleaguered property market through recent policy measures in hopes of boosting confidence around the sector which accounts for approximately 70% of the country’s household wealth. Through targeted financing support for debt-laden developers and incentives to complete unfinished projects and putting cash into the hands of would-be home buyers, Beijing is seeking to address the protracted downturn caused by unfinished developments, oversupply, and rock-bottom consumer confidence, further dented by stock market losses and job uncertainty. As a result of the aforementioned policies, a gradual reduction in housing inventory, increased liquidity for struggling developers, and more timely delivery of pre-sold units are expected to be key factors in alleviating the ongoing slump in the sector.
In addition, with local governments now afforded somewhat greater fiscal leeway and banks incentivized to increase lending, officials hope this will revive the property market. According to research from Goldman Sachs, these measures are expected to stabilize the property market by late 2025 as well as lay the groundwork for further measures aimed at restoring consumer confidence. The stabilization, however, is contingent upon an additional estimated $1.2 trillion fiscal stimulus aimed at further providing liquidity support to developers, reducing housing inventory, and ensuring the completion of unfinished developments. Without this additional fiscal stimulus, it is estimated that it could take the property sector an additional 3 years to fully stabilize.
China’s latest monetary policy moves underscore a targeted effort to boost credit access, improve liquidity, and shore up stock market stability amid challenging economic conditions. A 50 basis point cut to the reserve requirement ratio, alongside reductions to key benchmark rates—including the one-year and five-year loan prime rates—signals Beijing’s intent to ease liquidity pressures and stimulate lending. A newly established RMB 300 billion fund, which supports brokers, insurers, and asset managers in purchasing equities and facilitating corporate share buybacks, has already injected some optimism into markets. While the markets initially greeted these measures with near euphoria-induced increases in stock prices, subsequently markets have pulled back to await tangible signs that the economy is improving.
Hang Seng Index performance (Source: Factset)
Since the announcements, the Hang Seng reached as high as 23,000 before pulling back to 20,506 as of Nov 1st. Meanwhile, China’s swap facility, allowing brokers, asset managers, and insurers to trade risk assets for highly liquid assets like treasury bonds and central bank bills, has also boosted the stock market. However, while the People’s Bank of China has left open the possibility of further easing, economists warn that meaningful progress toward a 5% growth target will likely require more extensive fiscal measures to tackle the structural challenges hampering the economy and lift consumer sentiment. Given past policy measures, which have tended to be more incremental rather than “the big bazooka” that some observers have called for, it remains uncertain how quickly these measures will impact consumers and whether additional stimulus will be implemented in the coming months and at what scale.
Alternative Stimulus Options for China: Western Lessons & Local Strategies
While China has taken a somewhat conventional approach to fiscal stimulus with a combination of interest rate cuts, fiscal support and capital market interventions it has also utilized some idiosyncratic measures such as recapitalizations of large banks, bail outs of local governments and even direct intervention in the property market. However some economists, like at the Financial Times and J.P. Morgan, argue that these measures are not enough to solve the underlying problems, which does beg the question, what are the alternatives?
China could take notes on what some Western countries did when growth was stagnating during the pandemic, which was to stimulate the economy through direct cash injections while both Chinese domestic consumption and consumer confidence are at all-time lows. This approach may be particularly effective for lower-income groups who are often the ones that need a boost the most. The bottom 50% of China’s population earns only 15% of the national income compared to the top 10% who earn 41% according to a Stanford study in 2015. With a greater majority of the wealth in the lower end of the income distribution tied up in real assets, the slump in the property market has affected them disproportionately as house prices are down 6.1% year on year. Therefore, in order to target these consumers China could expand on its subsidies for down payments on houses or encourage greater foreign and local investment into unsold housing inventory which would positively affect property prices.
The stimulus checks in the US and furlough schemes in the UK are examples of this and proved to be quite effective in encouraging consumption and buoying those on the lower end of the income distribution by giving them a cushion to fall back on. Looking at it fiscally, this is feasible for China considering the magnitude of the stimulus they just announced but politically it might be seen as an imitation of the West. Socially, Chinese consumers tend to spend less as well: 55% of China’s GDP comes from consumer spending compared to 70% in the US. This might dampen the effectiveness of such a policy, leading to the exploration of other alternatives that could be implemented.
Other measures that help to discourage savings are advancing the welfare state by improving social security and healthcare support. In China, the proportion of corporate contributions to retirement savings is almost three times as much as in the US, resulting in an increased burden on companies. If this was instead shifted onto the government it might result in increased investment from businesses. This is again following along the lines of the West but might be more politically viable and even better in easing financial worries. Traditional thinking also dictates how children must support their parents in old age and sending them to a nursing home is looked down upon. While changing the Chinese culture will be extremely unlikely, it just means that the government has to try harder to shift the burden onto themselves to free up private savings and investment. However, consumer spending is only one piece of the puzzle contributing to China’s troubles. Policies that target investment into unsold housing and incentivise business investment might be more effective in revitalizing the private sector. This could involve deregulation or policy stability. China could do more to deregulate certain industries like technology where there has been a significant crackdown which started with a calling off of Ant Group’s IPO which would have been the largest in history and has resulted in a collapse of share price from tech giants like Alibaba and Tencent. By easing some of the measures put in place to regulate tech companies they could help to not only lead a tech-based recovery in the stock market but also translate to an improved outlook for economic growth.
Conclusion
China’s economic reforms, once the engine of its meteoric export-driven growth, now face considerable headwinds and uncertainty. After years of unprecedented expansion, a meltdown in the property market, debt-laden local governments, sizable stock market declines, demographic pressures, and stagnating productivity have led to deflation and questions about China’s ability to hit its stated growth targets. These factors have pushed Beijing to implement an array of monetary policy measures. Through strategic rate cuts including lowering reserve requirements, targeted support for indebted property developers, and initiatives to boost liquidity in capital markets, policymakers aim to steady the property sector and restore dented consumer confidence.
While these measures hold out the possibility of arresting the deflation, the results remain uncertain, with analysts cautioning that the effectiveness of these interventions will depend on further, potentially bolder, fiscal actions. As China’s growth model approaches a crossroads, balancing the urgent need for reform with cautious, sustainable development may be Beijing’s best hope to maintain its economic prominence.
By Alexander Lockhart, Kabir Wali, Nicolò Giuliani, and Valeria Piazzese
Sources
- South China Morning Post
- Atlantic Council
- Financial Times
- Reuters
- FactSet
- Federal Reserve Economic Data
- CNBC
- Bloomberg
- China-Briefing
- WITS Data
- OEC.world
- New York Times
- WorldBank.org
- South China Morning Post
- Trading Economics
- EIB.org