China’s Exceptional Stimulus Measures Have Consumers Wanting More

Owning a house in Beijing should have been a profitable investment for Zhang, a 32-year-old consultant. But the years-long collapse of China’s property market means it is “definitely losing money”. Asked if this week’s exceptional stimulus measures would restore his confidence in the Chinese economy, he was clear: “Absolutely not.”

The plan – Beijing’s largest since the pandemic – includes billions of dollars from the central bank to support the stock market, cuts in key rates, measures to increase bank liquidity and efforts to stabilize the prolonged real estate crisis in China, including a 50 basis point reduction in interest rates. for mortgage holders like Zhang.

That was followed Thursday by one of the most forceful statements from China’s politburo, which held what analysts called an “emergency” meeting on the economy and announced it would step up fiscal spending to support growth.

The combination energized markets, putting Chinese stocks on track for their best week since 2008.

“We were. . . surprised by the pace of policy change,” said Robin Xing, chief Asia economist at Morgan Stanley, who predicted it would be the first in a long cycle of policies to revive the economy.

But the plight of people like Zhang shows the scale of the challenge facing Beijing as it seeks to revive consumer confidence in the world’s second-largest economy.

The three-year real estate crisis, triggered by Beijing’s crackdown on real estate leverage and accompanied by other crackdowns on sectors ranging from e-commerce to education and online finance, has shaken consumer confidence. households. Combined with industrial oversupply and growing debt, analysts warn that China risks falling into a deflationary spiral.

Despite booming Chinese exports, which help support GDP growth, industrial profits at large companies fell nearly 18 percent year-on-year in August. This is partly due to “insufficient effective market demand”, the National Bureau of Statistics said on Friday.

In the national economy, the lack of confidence is evident everywhere. Retail sales have risen less than 1 percent since the start of the year in seasonally adjusted terms, research group Gavekal estimated, as consumer prices flirt with deflation, youth unemployment is on the rise and tax revenues and expenditures fell in August.

The monetary policy program, announced Tuesday by central bank Governor Pan Gongsheng, accompanied by financial sector regulators, contained powerful support for the stock market, including swaps to help brokers, funds and insurance companies to increase their stock market holdings and funds for businesses. carry out share buybacks.

The central bank also lowered the short-term benchmark rate by 20 basis points and reduced the level of reserves that banks must hold, freeing up about RMB 1 billion ($143 billion) for lending.

Signals of easing lifted global markets and cheered trading partners. “We are very pleased to see these additional measures,” Australian Treasurer Jim Chalmers said during a visit to Beijing on Friday. He highlighted Australian Treasury forecasts that China, Australia’s largest trading partner, was facing its three weakest years of growth since the 1970s. Shares of Australian mining company Fortescue iron, gained 5 percent, while those of BHP and Rio Tinto rose 3 percent on Friday.

“[Weak] “The growth of the Chinese economy has been one of the main contributors to the weakness of the global economy,” he said.

But economists worry that, with the exception of lower mortgage rates, aid to households is not enough. Reductions in interest rates on bank deposits will affect all household incomes.

“Beijing will likely need to come up with more concrete programs in the coming weeks to reassure the market that more money is being used to help consumers maintain their purchasing power,” said Fred Neumann, chief economist for Asia at HSBC. “We need monetary easing, but we also need to stimulate demand through fiscal means. »

“These monetary policies by themselves are not going to be a game-changer,” said Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs. “But they send the message that senior leaders are seeking to stabilize the situation. »

President Xi Jinping sought to reinforce that message through the politburo statement, which tempered the government’s usual optimism about the economy with a more solemn tone.

“New situations and problems have emerged in the current economic functioning,” the statement said. “We must. . . face difficulties. »

Economists say the communiqué’s pledge to intensify “counter-cyclical adjustment of fiscal and monetary policies” through the issuance of special long-term treasury bills and special local government bonds could mean that more Fiscal stimulus measures are underway, some of which would benefit consumers.

Goldman Sachs said this could take the form of ultra-long central government sovereign bond issuances of an additional RMB 1-2 billion.

Morgan Stanley’s Xing agreed that the government could widen its budget deficit this year by as much as RMB2 trillion to fuel social spending or debt reduction.

But that would still fall short of the 10 trillion yuan in fiscal stimulus Xing and other economists say will be needed over two years to fully revive the economy. “We’re not there yet,” Xing said.

For China’s long-suffering homeowners, help can’t come soon enough.

“I’m not optimistic,” said another owner from Beijing who asked to remain anonymous. “Prices are falling, so no one is buying or selling. I don’t know how they [the government] can solve this problem.

Additional reporting by Nian Liu in Beijing and Nic Fildes in Sydney