China’s Economic Stimulus Measures: A New Beginning for the Chinese Economy?

The Chinese economy, the world’s second-largest, has been experiencing a slowdown in growth in recent years. The official numbers released last week showed that the Chinese economy grew by 5.2% in 2023, a marked slowdown from the double-digit growth in decades past. In response to this economic downturn, the Chinese government has announced a series of measures aimed at boosting market confidence and stabilizing the economy.

On February 5, 2024, the People’s Bank of China (PBOC) announced that it would allow banks to hold smaller cash reserves. This move is expected to release 1 trillion yuan ($139.8 billion) in long-term capital. According to Tao Wang, head of Asia economics and chief China economist at UBS Investment Bank, this announcement may be interpreted as the beginning of a policy pivot from previous reactive and piecemeal measures by investors.

The central bank’s easing announcements have been welcomed by investors, who are looking for further signs and acts of policy support. Beijing has been reluctant to embark on massive stimulus, which would also widen the yield gap between China and the U.S. given the Federal Reserve’s tighter stance on monetary policy. However, the magnitude of the central bank’s announcement exceeded Nomura’s forecast for a 25 basis point reduction.

The PBOC’s decision to cut the reserve requirement ratio (RRR) by 50 basis points is a significant step towards enhancing credit support for developers. For developer financing to fundamentally and sustainably improve, property sales need to stop falling and start to recover, which could require more policy efforts to stabilize the property market.

Real estate troubles are just one of several factors that have weighed on Chinese investor sentiment. The massive property industry has dragged down growth, and along with a slump in exports and lackluster consumption, kept the economy from rebounding from the pandemic as quickly as expected. The mainland Chinese and Hong Kong stocks have steadily dropped to multi-year lows.

However, recent government announcements and media reports indicating forthcoming state support for growth and capital markets have helped put a floor under the market and prevent it from capitulating and falling further. But a fundamental turnaround in the economy is needed for investors to return to Chinese stocks, which will take time.

Chinese authorities have called for much stronger measures to boost market stability and confidence. On Monday, Chinese Premier Li Qiang called for such measures during a press conference. On Tuesday, Bloomberg News reported that Chinese authorities are looking to use state-owned companies’ funds to stabilize the market, in a package of about 2 trillion yuan ($278 billion).

However, the Citi analysts pointed out that this 2 trillion yuan in capital would need to be deployed over weeks or months given current regulations, and would only amount to a fraction of current trading volume. Moreover, it seems not sufficient to create a real impact on the underlying challenges in the economy.

For many consumers and businesses in China, uncertainty about the future remains high in the wake of recent Chinese government crackdowns on internet technology companies, the gaming sector, after-school education businesses, and real estate developers. Tensions between the U.S. and China, centered on tech competition, have also weighed on sentiment.

Chinese authorities have made it a point to talk up support for the non-state, private sector. Ultimately, what is going to get fundamentals back on track is meaningful improvement in confidence and sentiment. Recent measures have been designed to give confidence a boost.

However, markets have generally been waiting for more action. Chinese authorities in October already announced the issuance of 1 trillion yuan in government bonds, alongside a rare increase in the deficit. To address the macro challenges, it still calls for opening the monetary box even wider and arguably with broader fiscal policy and easing deleveraging policy.

Governor Pan’s comments about the narrowing difference between the U.S. and Chinese monetary policy are clues for more monetary accommodation down the road, especially with the Fed expected to ease later in the year. The Chinese economy is set to hold its annual parliamentary meeting in March, at which it could reveal a wider fiscal deficit and other policies for the year ahead.

In conclusion, China’s economic stimulus measures, including the PBOC’s easing announcements and the government’s plans to use state-owned companies’ funds to stabilize the market, are a new beginning for the Chinese economy. However, a fundamental turnaround in the economy is needed for investors to return to Chinese stocks, which will take time. The Chinese government’s efforts to boost market stability and confidence are a step in the right direction, but more action is needed to address the underlying challenges in the economy.