China Injects $150 Billion to Boost Economy
China, the world’s second-largest economy, is showing signs of a significant slowdown, which has many economists worried and has seen financial markets having to adjust. Just last month, the People's Bank of China (PBOC) announcedan economic stimulus plan of around $150 billion, or 1,000 billion yuan, with the intention of boosting domestic demand and bringing liquidity into the economy, especially in the struggling real estate industry. The plan's capacity to solve China's present key structural difficulties has been called into question.
Real Estate Crisis and Stimulus Measures
The decision to inject $150 billion into the Chinese economy represents the most significant economic intervention since the COVID crisis. China is seeking to mitigate the effects of the economic slowdown, which has been caused by both the real estate crisis and weak consumption. The stimulus plan is based on monetary measures designed to increase the liquidity available to commercial banks and reduce borrowing costs. A 50 basis point reduction in the reserve requirement rate has been implemented. This measure is aimed at making loans more accessible to businesses and individuals. A similar reduction had taken place in February 2024, and had a limited impact on Chinese growth, with GDP rising by just 4.7% in the second quarter.
Real estate, which makes up over 25% of the Chinese GDP when construction activities are included, is among the industries most impacted by this downturn. Evergrande and Country Garden are just two of the big names in the Chinese real estate sector that have filed for bankruptcy since 2020, severely undermining investor trust in the industry. August 2024 saw the sixteenth consecutive month that property values declined, with a reduction of close to 6% in China's major cities. In an attempt to counter this crisis, the PBOC has decided to reduce interest rates on outstanding mortgages by 0.5%. This measure is designed to ease the debt burden of Chinese households, who continue to regard property ownership as a key investment. In addition, the personal contribution required to purchase a second home has been lowered from 25% to 15% of the purchase price.
Beijing's decision not to opt for a massive stimulus package, similar to the one in 2008, is largely explained by the latter's undesirable side effects. After the global financial crisis, China's huge stimulus package helped to sustain growth, but it also led to high local indebtedness and unbalanced growth, driven by low-quality infrastructure projects. This time, the Chinese authorities have chosen a more cautious approach, focusing on targeted measures to avoid a further build-up of uncontrolled debt while seeking to stabilize key sectors of the economy.
China’s $150 billion stimulus package includes provisions to support the country's financial markets, which have struggled in recent years. The People's Bank of China announced new lending facilities designed to allow financial intermediaries, asset managers, and insurance companies to borrow funds to purchase shares. Initially set at 500 billion yuan, this could eventually expand to 1.5 trillion yuan. The primary goal is to stabilize China's stock markets, which are currently facing a challenging period. Furthermore, an initial investment of 300 billion yuan is being made into an equities stability fund. Through this program, publicly listed firms will be encouraged to buy back their shares, which will increase investor confidence in the Chinese markets.
Lingering Challenges and Revised Growth Forecasts
Still, many analysts doubt the plan's overall effectiveness given the scope of these initiatives. A few experts caution that these steps may not be enough to address China's more serious structural issues. The real estate industry is slowly recovering, and household spending is still low. Furthermore, the debt held by local governments has risen to previously unheard-of levels, making it extremely difficult for them to fund important development initiatives.
In August 2024, underwhelming macroeconomic figures led institutions such as Goldman Sachs to lower their annual growth forecasts, cutting them to 4.7%, well below Beijing’s 5% target. To meet its growth objectives, China must go beyond monetary policies and consider broader reforms, including tax changes and wage increases, to sustainably boost domestic demand.
Although China’s stimulus package is significant, it appears to address short-term symptoms rather than the underlying causes of the country’s economic challenges. While these measures may offer temporary relief, particularly to the real estate and financial sectors, their long-term effectiveness will largely depend on China’s ability to pursue broader structural reforms, encompassing taxation, wages, and wealth redistribution.