In September of this year, the Chinese Communist regime made a dramatic move by subtly acknowledging that the economic stimulus plan implemented in May did not help the struggling Chinese economy. The monetary and fiscal stimulus measures introduced in September far exceeded any previous efforts by the regime. While these measures may help the Chinese government achieve its goal of 5% actual growth in 2024, they are unlikely to restore the growth momentum of the Chinese economy.
In terms of fiscal measures, the Chinese Communist regime plans to issue approximately 2 trillion yuan (about $284 billion) in sovereign debt. Half of this will be used to assist heavily indebted local governments, while the other half will go towards a series of support programs for individuals and families.
Part of this plan involves providing so-called “living subsidies” to the poor, ostensibly to celebrate the 75th anniversary of Communist Party rule on October 1st. While recipients are likely to quickly spend this money and stimulate economic activity, the long-term impact of this measure is expected to be minimal.
It is reported that the regime will also provide a monthly subsidy of 800 yuan (about $114) for each child in families with two or more children. This measure is expected to have a more lasting impact on economic activity, although such families are now rare in China. Undoubtedly, this measure is also aimed at encouraging fertility to offset the population pressure caused by low fertility rates in recent years, although it will take 15-20 years for an increase in fertility rates to affect China’s labor force dynamics.
Furthermore, Shanghai, as the largest city in the country, will provide 500 million yuan (about $71 million) in consumption vouchers for its residents to use in dining and entertainment. This measure accounts for less than 1.0% of Shanghai’s Gross Domestic Product and is unlikely to have a significant impact. The regime has also allocated 1 trillion yuan (about $142 billion) to recapitalize six major banks, presumably to offset the harm caused by closures resulting from the real estate crisis.
In terms of monetary policy, the Governor of the People’s Bank of China (PBOC), Pan Gongsheng, outlined several measures. The PBOC will lower the one-year Medium-term Lending Facility (MLF) rate from the current 2.3% to 2.0%. The seven-day reverse repo rate, a key policy tool of the central bank, will be reduced from 1.7% to 1.5%. While these changes may seem negligible compared to the recent half-point rate cut by the Federal Reserve in the United States, they are indeed bold and aggressive compared to previous actions taken by the PBOC.
To further stimulate lending and economic activity, the PBOC will reduce the required reserve ratio for banks’ loan-to-deposit ratio. To boost the continually plummeting stock market, the PBOC will also provide 500 billion yuan (about $71 billion) in loans to institutions such as investment funds, brokers, and insurance companies. The PBOC will also provide an additional 300 billion yuan (about $42 billion) to fund stock buybacks by listed companies.
Undoubtedly, the PBOC hopes that a rising stock market will offset the partial loss of household wealth caused by the real estate crisis and its suppressive effect on property values. In a direct effort to help the real estate sector, the PBOC will lower the interest rates on existing mortgage loans, providing relief for existing homeowners who, unlike Americans, do not have the convenience of refinancing mortgage loans. To increase the number of homebuyers, the PBOC also plans to reduce the down payment ratio for a second home from the current 25% to 15%.
On the surface, the list of fiscal and monetary measures by the Chinese Communist regime may seem extensive and impressive, but they are likely to be ineffective. The regime needs to restore the confidence of Chinese consumers as a whole, rather than simply making credit cheaper and more abundant, or aiding specific groups in need. Encouraging private enterprises is crucial as they make up an estimated 60% of the Chinese economy and account for 80% of urban job growth.
The core issue currently is that Chinese consumers are reluctant to spend. According to statistics, the Chinese consumer confidence index has dropped by about 3% compared to last spring and nearly 30% since 2022. In some ways, this unfortunate situation reflects the lingering effects of the “Zero COVID” measures imposed globally during the COVID-19 pandemic, which halted economic activity for a significant period after the end of the pandemic and disrupted employment and wage disbursements. Additionally, the impact of the real estate crisis on property values adds to this burden. The rebound in the stock market cannot offset this strain. Under the Chinese Communist regime, a family’s housing comprises a significant portion of its net assets, and since the outbreak of the real estate crisis in 2021, property prices have fallen by over 12%.
At the same time, capital expenditures by private business owners and managers for company expansion, equipment modernization, and employee recruitment have slowed to a negligible level. Fixed capital formation has actually decreased in the past year. Accustomed to rapid growth in earlier years, Chinese private business owners are shocked by the slowdown in recent years. They still remember when the Chinese Communist Party leader Xi Jinping publicly criticized private enterprises for only caring about profits and not the agenda set by the Communist Party. While Xi Jinping has recently changed his stance, many private business individuals are still wary about the regime’s future in the coming years.
Looking ahead, unless the regime can find effective ways to restore confidence in the real estate and private enterprise sectors, economic growth will inevitably continue to struggle. The feasibility of China achieving its target of 5% actual growth in 2024 is doubtful. The regime’s positive announcements regarding achieving economic growth targets are likely to rely more on statistical manipulation than actual economic activity. Nevertheless, the regime has hinted at further stimulus measures. Perhaps these upcoming actions can address the confidence issues. Undoubtedly, if more concerted efforts are not taken in the future, the Chinese Communist economy will continue to be in a state of weakness.