China wants to avoid becoming the new Japan at all costs. The economy of the Asian giant is showing more and more signs that it is following in the footsteps of its neighbor and that it is following the same path followed by the Japanese country, which has suffered from three decades of stagnation and deflation and a financial market that was unable to compete with its European and American peers during this period. Last week, China announced a new package of stimulus measures in a bid to revitalize the country’s economy and emerge from the crisis that has hit it in recent years. However, the challenge facing the government is enormous and, despite the strength of the latest recovery plan, Analysts agree that the country will have to do more to emerge from the quagmire.
Beijing has launched a veritable battery of measures to revive the country’s economy, focusing in particular on the revitalization of consumption, support for the country’s financial markets and also on improving the situation of the real estate sector, both on the both supply and demand. From easing the conditions for purchasing housing to lowering mortgage rates and costs, including liquidity injections so that listed companies can buy back their shares on the stock market… Beijing wanted to launch a series of energetic measures to convince the markets of its determination to stabilize the situation.
Investors reacted to these measures with optimism, generating strong increases in recent days, which led the Chinese stock index CSI 300 to rebound by 25% in 5 sessions, experiencing last week one of the most bullish days since 2008. a bull market situation. And it is not only the Chinese stock market that has benefited from the measures launched by Beijing; The price of iron, for example, has also increased by more than 20% in recent days, confirming that it is once again a bull market.
The problem for China is that one thing is to be able to give an upward impulse to the market thanks to an injection of optimism after the announcement of the new measures, and another is that these are sufficient to restore the economy of a country which has challenges to overcome. in order. Experts have analyzed the battery of decisions announced by China in recent days, and their verdict is very clear: it is not enough. Analysts say Beijing will need to take more steps forward in the short term if it wants to resolve its problems and emerge from the crisis. After announcing the battery of monetary policy measures, experts agree that it will be necessary to adopt new fiscal stimulus measures for the country to achieve its objectives.
Ronald Temple, chief market strategist at Lazard, explains that “the measures adopted last week remain insufficient to resolve the country’s underlying economic problems, but they indicate that the government is mobilizing on several fronts in a coordinated manner to tackle the problems plaguing the economy. “, underlines Temple. The expert underlines that “speculation has multiplied according to which these measures would be followed by a fiscal stimulus, probably in the form of an additional issuance of very long-term bonds”, underlines- he “However, beyond monetary and fiscal stimulus measures, “China needs additional structural reforms to facilitate rising consumption and falling household savings.”remember.
China’s Challenges and the Need for a Fiscal Stimulus Plan
China faces three challenges that it will have to resolve and for which the measures announced seem insufficient. “Even if the Chinese economy needs to regain its dynamism, it is unlikely that the announcements of the Third Plenum will have a positive impact on consumer and investor confidence,” explains Alicia García Herrero, chief economist for Asia -Pacific at Natixis CIB.
According to García Herrero, China has 10 conflicting points to resolve: low budgetary margin; the limitation that pressure on the yuan imposes on monetary policy and bank profitability; the growth model based on supply, but without sufficient internal demand; dependence on external demand; deflationary pressure from excess capacity; private consumption weighed down by the highest savings rate in the world; an incomplete adjustment of the real estate sector; excessive investment at the expense of increasingly low returns on fixed income securities; the aging of the population and, finally, competition with the United States on a technological level.
For García Herrero, this context forces China to resolve three problems. First, “how to rebalance foreign trade, which would require a strengthening of private consumption”; second, “related to the first problem is the growing problem of overproduction in China, at a time when protectionism against Chinese imports is increasing; finally, he highlights how “the private sector is increasingly seen as undermined by strict regulations”.
For his part, David Rees, senior emerging markets economist at Schroders, is clear: “For China to exceed growth expectations again, more decisive policy measures are needed,” explained before the authorities’ announcement, but emphasizes that “unless fiscal stimulus measures are adopted, we believe that China will not reach its GDP growth target of 5% this year, and that the economic activity will slow further in 2025. This fiscal recovery plan is what experts are constantly calling for.
Sophie Altermatt, economist at Julius Baer, believes that “the measures announced so far will have little impact on the real economy, and we know very little about the decisions that will be taken” after the latest plan. RELAUNCH. Altermatt underlines that “for the Chinese economy, the support measures announced so far by the central bank constitute first steps that we welcome, but they will have little impact when it comes to solving the demand problem from which the economy is suffering. he said. The economist confirms the need for new fiscal stimulus measures and explains that “to sustainably improve domestic consumption, budgetary support for household income must go beyond specific transfers, and It should be more oriented towards improving the retirement and social security system,” he emphasizes.
Rees confirms Altermatt’s view, acknowledging that “fiscal stimulus measures have supported activity in some sectors, such as infrastructure investment, but have so far not been large enough to offset the housing crisis. “The issuance of public debt securities was a positive force, the weakness of bank credit slowed down the credit impulse,” he explains. The short-term problem is that there will be a US presidential election in November and, as Rees explains, “policymakers could wait for the results of the US election in November, which could have significant implications for the economy and Chinese financial markets. Regardless, much more decisive action is needed for China to exceed expectations again,” he says.
The Bank of America analyst team, led by Helen Qiao, confirms that “whether the latest measures adopted will be sustainable and succeed in increasing domestic demand growth will depend on the measures adopted now, especially if they are implemented in a coordinated manner. We expect the Ministry of Finance to adopt further fiscal stimulus measures in the coming weeks.which may include, but is not limited to, the issuance of special bonds to support consumption and the real estate sector.
