The Chinese Communist Party (CCP) has been focusing on monetary support, hoping to make borrowing easier through interest rate cuts and loan rate reductions, rather than implementing structural reforms to benefit the general public. Analysts believe that this aggressive stimulus weakens long-term growth potential and is destined to be ineffective.
On September 24, the CCP’s central bank for the first time simultaneously implemented interest rate cuts, reserve requirement cuts, and structural monetary policy measures, making it the largest stimulus measure since the outbreak.
The stimulus package includes lowering the benchmark interest rate, lowering the bank reserve requirement ratio by 50 basis points, releasing approximately 1 trillion yuan in new loans; lowering existing home loan rates, and reducing the minimum down payment ratio for second home loans.
Commentators believe that the authorities’ actions are akin to fans loudly cheering “Go team” at the TV, hoping their team will win the game, but this will ultimately be ineffective.
Nomura economists wrote in a report that relying solely on these monetary and financial policies is not enough to stop the deteriorating economic slowdown in China. The real bottleneck facing the Chinese economy is the lack of effective demand, rather than available loanable funds.
In recent years, the CCP has been focusing on using monetary policy to stimulate the economy, making borrowing easier, rather than through fiscal subsidies and improving welfare such as healthcare and pensions to instill consumer confidence. Not long ago, the authorities just announced a delay in retirement age and extended the period of paying into the pension fund, burdening society.
In May this year, the authorities also used the “three arrows” of reducing down payments, lowering interest rates, etc., to stimulate the real estate market, but the property market continued to decline. In August, new home prices in China dropped by 5.3% year-on-year, the fastest decline in nine years.
Since the peak of property prices in 2021, prices in first-tier cities have dropped by 30%. Chinese households, where 70% of wealth is invested in real estate, are already burdened with a significant amount of debt and are reluctant to spend more.
The latest Consumer Price Index (CPI) shows that in August, China’s CPI only rose by 0.3% compared to the same period last year, the lowest level in three years, indicating continued weak overall demand. According to China’s National Bureau of Statistics, the current consumer confidence index is 86, approaching its historical low.
Sun Guoxiang, an associate professor in the Department of International Affairs and Business at Nanhua University in Taiwan, told Epoch Times that the CCP government tends to use monetary policy to stimulate the economy to avoid exacerbating fiscal burdens, aiming to cultivate the habit of independent consumer spending among the general public because monetary policy is easier to control.
“However, the core problem faced by China now is insufficient consumer confidence. Relying solely on monetary policy is unlikely to achieve economic recovery, leading to doubts from the outside world about the effectiveness of Beijing’s economic stimulus policies.”
David Wong, an economics professor at the University of South Carolina’s Darla Moore School of Business, told Epoch Times that the CCP government is essentially trying to promote the real estate industry by all means possible and trying to draw out savings from the people. It can be said that they have run out of options.
“Now they are trying every means to make people buy houses, but it’s not working. The reason is simple: no one will buy a house when prices are still falling. When prices continue to decline, no matter how low the interest rates are, no one will invest in an asset that is constantly losing value. Moreover, the Chinese real estate market is vastly oversupplied, with excessively high inventory.”
In this wave of stimulus plans, the CCP also aims to boost the mainland stock market. The PBOC announced that it would provide 500 billion yuan in loans to funds, brokerages, and insurance companies, repurchasing Chinese stocks, along with repurchasing and increasing special re-lending quotas with a total of 800 billion yuan.
The Chinese stock market saw a rare surge, with the Shanghai Composite Index rising from 2748.85 points on September 23 to 3087.53 on September 27, hitting the highest point since May.
Against the backdrop of China’s economic contraction, the authorities are not rescuing private businesses or increasing residents’ incomes but choosing to inject liquidity into the stock market, which does not provide significant help to the real economy of China. Unlike Western societies where most people invest in real estate, the number of individuals investing in the stock market in China is limited.
American economist Davy J. Wong told Epoch Times that such stimulus measures are essentially short-term behaviors and do not address the fundamental economic issues. The fundamental issues lie in high tax burdens, inadequate social security, lack of vibrancy in private businesses, and no improvement in economic and trade relations between China and the West.
Some netizens believe that the newly printed money by the central bank is essentially debt, and this massive injection of liquidity ultimately flows to the wealthy, without substantial reform measures, making it difficult for ordinary people to benefit in the end, but requiring them to foot the bill in the long run.
David Huang stated that Beijing believes in social Darwinism and does not recognize the social care for vulnerable groups adopted in Western societies. So they always resort to monetary policy, where the central bank prints as much money as it wants, resulting in increased government debt and dilution of the cash held by ordinary people.
Sun Guoxiang stated that monetary policy increases asset prices rather than promoting the real economy, which may erode the purchasing power of ordinary people. Those who do not invest in the stock market or real estate actually find it hard to benefit from the rising capital market and instead face higher living costs.
“Under the backdrop of relaxed monetary policies, most of the funds stimulated by monetary policy tend to flow to state-owned enterprises, large private enterprises, and asset owners. These groups are more likely to obtain low-cost loans, further enhancing their advantages in the capital market. In contrast, small and medium-sized enterprises and ordinary people are at a disadvantage in the loan market and find it difficult to directly benefit from monetary policy.”
Some netizens commented that the central bank’s operation is equivalent to secretly looting tens of billions from the entire nation’s people and distributing it to the outstanding players involved in this stock speculation competition. While other countries rob the rich to help the poor, China is robbing the poor to enrich the rich.
Xie Tian stated that the CCP’s current goal is to boost the stock market, hoping that people will withdraw their savings to invest in stocks. However, once the national giants and state-owned enterprises exit at the peak, ordinary people will be left with nothing.
Analysts believe that China’s decades-old investment-driven growth model has reached its limits and requires fundamental reform of the economic system, including income redistribution and increased transfer payments to households, moving towards a more sustainable consumption-driven growth model.
However, the current economic stimulus plan in China has done little to address the underlying structural issues hindering economic growth.
In 2008, the authorities introduced a 4 trillion yuan stimulus plan, which brought massive local government debt, overcapacity, and excess housing supply, resulting in China failing to transition from state-led investment to household consumption and exacerbating the situation.
Sun Guoxiang stated that continuing with the current stimulus plan following the path of the 2008 4 trillion yuan stimulus policy could lead to resource misallocation, worsening debt burdens, overcapacity issues, making it difficult to effectively boost domestic demand and consumption. This approach does not address the fundamental issues in China’s economy, such as weak domestic demand, lack of consumer confidence, and structural imbalances, further deteriorating China’s economic structure and weakening long-term growth potential.
David Wong stated that the current stimulus effects are akin to administering a stimulant without addressing the fundamental issues of the economy. Real stimulus involves increasing welfare for the people, distributing money to the people, issuing vouchers, reducing the tax burden on the people – this is true stimulus.
Xie Tian pointed out that the purpose of Beijing’s large stimulus policy is to create a false sense of prosperity to deceive the public. It aims to make the economic numbers look better, essentially whitewashing troubles. They must lift the economy, even if artificially, as doing nothing is not an option.