Beijing Must Feel Like It Is Under The Gun, And It Definitely Is

Beijing has again moved to jumpstart China’s beleaguered economy. Implicitly admitting that its May stimulus package had failed to do the job, the nation’s leadership in September made a dramatic gesture, advancing monetary and fiscal measures far beyond anything to date. These steps may help Beijing meet its 5 percent real growth target for 2024, but they will not restore China’s economic momentum.

The fiscal measures present a strange mix. According to China’s Xinhua News Service, Beijing plans to issue some 2 trillion yuan (about $284.4 billion) in additional sovereign debt. Half this amount will help already heavily indebted local governments. The other half will go to a number of support programs for individuals and families.

Part of this support for individual Chinese and families will involve giving what Beijing calls “living allowances” to the poor, ostensibly to celebrate the 75 anniversary of communist rule. No doubt recipients will spend these monies quickly and provide an immediate fillip to consumer spending. This measure, however, can have little lasting effect. Beijing will also offer an ongoing monthly allowance of 800 yuan ($114) for each child in families with two or more children. This will have a more lasting effect on economic activity, though there are relatively few such families in China these days. No doubt this measure also aims to encourage births and thereby counteract the demographic pressure imposed on the economy by years of low fertility rates. It might help but it will take 15-20 years before any rise in births today can influence China’s workforce.

City of Shanghai from its own resources will offer 500 million yuan in vouchers for people to use on dining, and amusements. At less than 1.0% of Shanghai’s gross domestic product, this measure can hardly have much overall effect. Beijing has also earmarked 1.0 trillion yuan (about $142 billion) to recapitalize six big banks, clearly an effort to remedy some of the harm done by the failures of the property crisis.

On the monetary side of the ledger, the People’s Bank of China (PBOC) will cut the 1-year medium-term lending facility rate from 2.3% at present to 2.0%. It will cut the 7-day reverse purchase rate, its main policy tool, from 1.7% to 1.5%. These changes look tiny compared with the latest Federal Reserve half-point rate cuts in the United States, but by the standards of past PBOC measures, the recent PBOC cuts look bold indeed.

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To further stimulate lending and presumably economic activity, the bank will reduce the amount of cash banks must hold in reserve against their deposit and loan portfolios. To lift China’s falling stock market, the PBOC will also make 500 billion yuan (about $70 billion) available for lending to investment funds, brokers, and insurers. It will make an additional 300 billion yuan available to finance share buybacks by listed companies. The bank’s hope no doubt is that a rising stock market will offset some of the household wealth lost to the property crisis and its depressing effect on real estate values. To help real estate directly, the PBOC will cut the rates payable on existing mortgages, a relief for existing homeowners, since unlike Americans, Chinese have no facility to refinance their mortgage. To increase home buying, the bank has also scheduled a drop in the required downpayment on second homes from 25% at present to 15%.

Though this list of fiscal and monetary measures may sound impressive, it will likely fail to do the trick. More than measures to make credit cheaper and more plentiful or to help certain of society’s needier demographics, China, if it is to get back its economic momentum, needs to restore confidence among the vast population of Chinese consumers. It also needs to encourage investment spending by private businesses, which are estimated to account for some 60% of the economy and 80% of new urban employment.

Certainly the Chinese consumer needs more help than this package offers. Households have lost confidence and remain unwilling to spend. At last measure the country’ consumer confidence index was down about 3% from last spring and almost 30% below its level in 2022. To some extent, this sorry state of affairs reflects the lingering effects of the zero-Covid policies that stopped economic activity and interrupted employment and paychecks long after the pandemic ended. More than this, however, is the effect of the property crisis on real estate values. No pickup in the stock market can repair this burden. A family’s home in China constitutes the bulk of its net worth, and real estate prices have fallen more than 12% since 2021, when the property crisis first broke.

Private business owners and managers are no better off. They have slowed their capital spending on expansion, modernization, and hiring to a negligible amount. Fixed capital formation has actually declined over the past year. Part of this shortfall reflects the shock the economy’s growth slowdown has had on a business community once accustomed to the rapid growth or earlier years. Private business owners and managers can also remember how not too many years ago, Chinese President Xi Jinping chastised them for caring more about profits than the communist party’s agenda. Xi has changed his tune of late, but memories are long, and they have left doubts about Beijing’s attitude in future years.

Without policies to restore confidence in these two crucial sectors of the nation’s economy, growth will continue to struggle. It is doubtful that China will deliver the targeted 5 percent real growth for 2024. If if it does report such growth, it will more likely come from statistical legerdemain than from genuine economic activity. Beijing has hinted at more stimulus to come. Perhaps these next actions can address the confidence problem. Without help on this front, the economy will continue in its weakened state.