Until recently, Xi Jinping and Chinese authorities gave the impression of accepting those weak economic performances as the price to pay for strengthening China’s long-term growth prospects (see our Focus note “China has its eyes on long-term strategic objectives, not on current weak economic growth.” 19 July 2024). Investors had long been hoping for “stimulus plans”, only to be disappointed each time limited and targeted measures were announced.

However, recent data appear to have raised a sense of emergency by Chinese officials, who have this time surprised by unveiling a package of economic measures designed to kick-start domestic activity and reverse the downward trend of the equity market.

The size of this package is significant, and the coordinated decisions regarding credit conditions, support to the real estate and equity markets, along with a probable fiscal stimulus to domestic consumption, are likely to have a visible impact on the economy in the coming months. In fact, they already rapidly had a strong effect on the Chinese equity market.

It remains to be seen whether those measures will be sufficient to reach the 5% GDP growth target set for 2024, but they are at least likely to reverse the recent downward trend and fuel a rebound in economic activity during the fourth quarter of the year.

A simultaneous cut in PBoC key rates and RRR

A simultaneous cut in the RRR and in interest rates had not happened since 2015. This time, it was combined with the announcement of a recapitalization of the six largest commercial banks, aimed again at fostering their capacity to supply credit. Those announcements signal a clear willingness to stimulate credit growth after it stagnated for four years.

The residential real estate market has been on a continuous slump since 2022. Once a strong tailwind for domestic consumption, it has now become a major factor undermining households’ sentiment and spending. To have a chance of seeing domestic consumption regain some momentum, the decline of the real estate market must be stopped.

Along with those sets of “supply-oriented” measures designed to ease and facilitate credit conditions and real estate investment, hints have been given of a coming fiscal support directed to households, especially low-income households. This type of measures, possibly financed by the issuance of new long-term government bonds, will likely be needed to stimulate demand and ensure the effectiveness of the easing on the supply side.

The package announced during the fourth week of September, although already significant, can be expected to be complemented in the weeks or months to come. After this initial large move, the Chinese authorities will likely fine tune and adjust their policy tools depending on developments in the economy and in markets.

Indeed, those challenges remain important and will continue to shape China’s economic future.

• Unfavorable demographic dynamics limit the growth potential going forward, even if some measures such as the increase in the retirement age that will come into effect in 2025 will help contain their impact.
• Households’ sentiment has been severely damaged by the succession of blows in the past four years. It will likely need time to recover durably, a necessary condition to see domestic demand bringing a larger contribution to total GDP growth.
• Businesses and investors’ sentiment has equally been damaged by the succession of regulatory crackdowns and antibribery campaigns. This has weighed heavily on the evolution of the equity market, with the perception that the authorities were not interested in the level of equity prices. In that respect, the latest announcements are an encouraging sign for domestic and foreign equity investors, but certainly only a small first step in rebuilding the confidence and sentiment toward Chinese listed companies.
• Trade barriers have already increased for China’s exports to the US and Europe. This trend is unlikely to reverse in the future, and the prospect of Donald Trump being elected as the next US President carries with it the risk of punitive US tariffs on Chinese imports that would likely shake global trade dynamics and hit the Chinese industrial sector. The contribution of exports to China’s GDP growth might be constrained by a less favorable environment for global trade in the coming years.

In this context, the resolute policy actions announced at the end of September are clearly positive as they will likely prevent growth to deteriorate further in the world’s second largest economy. But they do not improve China’s medium-and long-term growth prospects significantly.