Beijing has set to work to try to resuscitate a patient who had been showing increasingly weak vital signs for several months (or even years). The Chinese government has announced a set of historic measures that affect several sectors, but whose objective is clear: to give Chinese agents the desire to consume and invest again. The recovery plan presents support measures for the financial sector, real estate and the stock market to revive the recovery of the world’s second-largest economy, amid concerns over its ability to meet its growth target this year. “Beijing is launching a salvo of stimulus measures to stabilise asset prices in the face of falling property prices and underperforming Chinese stocks. China acknowledges it is dangerously close “Japan is emerging from the deflationary experience that Japan experienced decades ago and is now taking decisive action to stabilize asset prices and keep animal spirits alive,” TD Securities said in a note to clients.
China has been suffering for several quarters from a real threat: the dreaded “Japanization”, a disease that locks the economy into a spiral of low growth, low inflation, low investment and consumption, which ends up “freezing” overall GDP growth. Japan has been fighting for decades against this evil that began to spread through its economy in the 1990s after the bursting of a historic real estate bubble. A declining demographic, high debt and the fear of making the mistakes of the past They have led the Japanese to avoid credit, reduce their consumption and structurally increase their savings, leaving the economy in a kind of eternal lethargy from which they have not yet emerged. China seems to be following in the same footsteps as Japan. With these measures, try to escape the Japanese “evil” or “Japanization” before it is too late.
The truth is that the Chinese economy is slowing down faster than expected. even questioning the 5% annual growth target. High levels of debt (especially of private and public entities) and one of the fastest demographic transitions in the world (China will lose 100 million people of working age every decade), They are putting the “Asian giant” on the brink of “Japanization”.
A financial lifeline
To begin with, the People’s Bank of China (PBoC or PBoC, the central bank) will reduce the bank reserve ratio to the lowest level since 2020 in order to increase credit. Analysts at Bloomberg They estimate that this measure could end up releasing more than $140 billion of liquidity into the market. Interest rates will also be lowered on one of its main tools for financing the country’s banks.which could later translate into a general lowering of interest rates to promote credit across the economy.
In addition, Interest on existing mortgages will be reduced (i.e. to mortgages already granted) – the Chinese will save about $21 billionwhich will affect some 50 million homes – and the minimum entry fee that those wishing to buy a second home must pay will be lowered to 15%. Increased support will also be given to a project allowing local governments to convert unsold homes into social housing. The authorities also announced the creation of mechanisms to offer some $114 billion in financing to securities firms, funds or insurance companies, as well as loans to listed companies to buy back their shares and thus increase their market value.
The central bank governor also unveiled a plan to support the country’s struggling real estate sector, which includes reduce borrowing costs by up to $5.3 trillion in mortgages and easing rules for buying second homes. For the country’s beleaguered stock market, China will release at least 800 billion yuan ($113 billion) in liquidity support, Pan added, noting that officials were studying the creation of an inventory stabilization fund.
Oxford Economics analyst Betty Wang explains why China has opened the floodgates after months of hesitation and less ambitious measures: “We believe that the recent rapid evolution of internal and external conditions was the main force behind the PBoC’s latest decision. At home, weaker-than-expected economic data in August suggested that the risk of missing this year’s growth target has increased. Abroad, exaggerated rate cuts have added to the Fed’s decision last week, as well as those of other major central banks. “The move into easing mode has helped ease depreciation pressure on the Chinese yuan and given the People’s Bank of China more room to ease monetary policy.”
Euphoria on the markets
Financial markets gave the package their thumbs up. The CSI 300 index rose for the fifth straight day, gaining as much as 1.3%, with more than 200 of its constituent companies rebounding strongly. Commodity markets joined the party, with oil rallying strongly, while the yuan barely budged against the dollar. Government bonds lost ground while stocks gained. Yields on China’s 10-year bonds rose 2 basis points to 2.05%, erasing an earlier decline to a record low.
Although the package of measures has exceeded expectations and likely brought growth closer to the 5% target, analysts question whether it will be enough to break China’s deep-rooted deflationary spiral and property crisis.
The housing crisis (as happened in Japan), the aging population, and the decline of the labor force reduce the country’s productive capacity, limiting GDP growth. In addition, deflation and weak private consumption result in a lower contribution of domestic demand to economic growth. The lack of dynamism in the economy can also discourage foreign investment and innovation, perpetuate GDP stagnation. China still has time to avoid this scenario, but the measures Beijing must take must go beyond economic stimuli (structural reforms).
“It is difficult to say what miracle solution can help solve everything”said Ken Wong, Asian equity portfolio specialist at Eastspring Investments Hong Kong. “While it is good to have accommodative monetary easing measures, there is still a long way to go to help shore up fourth-quarter growth.” “The focus of today’s session is to instill confidence in the market, judging by the fact that the authorities revealed the measures in one go,” said Larry Hu, head of China economics at Macquarie Group. “The stimulus will still need to be coordinated with other policies, especially follow-up policies on the fiscal side.”
Bloomberg economists say that “this will be a memorable day for China’s monetary policy. The People’s Bank of China has unleashed a series of measures, from cutting interest rates and reserve requirements to making funds available to central bank investors to buy stocks. Each step is significant in itself. Their implementation at the same time is highly unusual and reflects the urgency Beijing feels to avoid deflationary risks and steer growth toward the 5% target this year,” the experts say.
Reviving China’s Real Estate Sector
These economists estimate that the increase in growth in 2024 will be about 0.2 percentage points, with most of the impact fading in 2025. Chang Shu, a Chinese economist. The Fed’s larger-than-expected half-percentage-point cut has given central banks across Asia more room to maneuver. But making money cheaper won’t boost the economy if Chinese consumers are unwilling to spend as they anticipate layoffs amid falling profits and continued declines in property prices.
Not everyone agrees on the impact of the measures. “It’s very far from a bazooka,” Raymond Yeung, ANZ’s chief economist for Greater China, said of the plan. “We don’t know to what extent the drop in mortgage rates will lead to a recovery in the real estate sector”.
Fed Helps Open Floodgates in China
“The start of Fed tapering now paves the way for aggressive stimulus in China as well, to support a weak economy and struggling real estate market, without putting unwanted pressure on the yuan. It remains to be seen whether these measures will be enough for China to meet its growth target of around 5% this year, but the easing has at least helped lift stock markets,” said Elisabet Kopelman, an analyst at Swedish bank SEB.
“Today’s policy actions are bold by historical standards,” says Oxford’s Wang. On the one hand, he points out, this is the first time since the pandemic that the central bank has simultaneously offered a combination of rate cuts, reserve requirement ratio (RRR) cuts, and structural monetary policies. On the other hand, youn A 20 basis point cut in the 7-day repo rate and a 50 basis point across-the-board cut in the RRR rate are also rare.In recent years, the PBoC has tended to steer its monetary policy in a precise and selective manner, the strategist points out.
“This is a big step forward for a conservative institution like the People’s Bank of China, which typically cuts rates in 10 basis point increments. Moreover, the policy rate has never been cut, while freeing up liquidity in the banking system through a lower reserve requirement ratio,” adds Volkmar Baur, analyst at Commerzbank.
The German bank economist fears, however, that these measures do not address the core of China’s problems: “They are neither supply-side nor cyclical. In particular, private demand is structurally too weak. As a result, inflation in China has been close to 0. percent for months, while the trade surplus has been increasing for months, the only growth has been in government-favored industries, which do not lack financing and uncertainty among the population, because the labor market is not functioning well and the labor market is not functioning well. The real estate market has been in crisis for years. Structural reforms improving social security and increasing the share of wages in total national income could ensure a decline in the high household savings rate and an increase in private consumption.
In the short term, Baur believes, China’s economic situation could improve somewhat. However, from a structural point of view, Chinese growth is expected to be weaker and, consequently, interest rates will be lower. “In our view, this is not yet the big bazooka needed to turn things around. But it can be complemented by fiscal policy measures and should at least provide a boost to Chinese growth in the short term.”. However, it will probably be too late for the government to reach its 5% target. We expect growth of 4.8% this year,” agrees Johan V Raychaudhuri Christensen, an analyst at Danske Bank.
