China Stimulus Announcements (September 2024)

China Acts to Support Economy, but More is Likely Needed

• Headline grabbing policy announcements out of China this week are raising hopes of meeting this year's growth target, but more is likely needed for a virtuous cycle to take hold.

Why Is China in a Bind?

• China's economy is struggling to gain traction as deflating the property bubble weighs on household balance sheets and confidence (see recent forecast). 
• The typical response to keep growth from rapidly decelerating would be to sharply lower interest rates and roll out fiscal stimulus.
• However, policymakers have been hesitant to take bold action as they are concerned about negative consequences such as:

1. Increasing the official budget deficit beyond roughly 3% of GDP. Although special borrowing likely means actual general government borrowing is substantially higher. 
2. Working against the desired deleveraging in highly indebted local governments.
3. Lowering interest rates too far such that it risks capital flight, adds more pressure to banking margins, or encourages speculation in the housing market.
4. Increasing moral hazard by giving cash handouts to households.

• As a result, the approach to policy thus far has been piecemeal, rather than the typical "all at once" approach most economists would suggest given the challenges of a deflating housing bubble, weak (even shrinking) loan demand, deflation, and downbeat consumer confidence.

What Is Being Done About It Now?

• Earlier this week the People's Bank of China (PBoC) held a press conference announcing a raft of monetary policy actions including: 

1. A cut to the seven-day reverse repo rate of 20 basis points to 1.5%. 
2. Cutting the required reserve ratio by 50 basis points – which should add $1 trillion yuan ($140B) in liquidity.
   1. However, it is not yet clear when this is to take effect. The interesting thing is that there was also some forward guidance that 25 to 50 basis points in cuts could be on the way.
3. $113 billion of liquidity supports for markets participants from the central bank for stock purchases, with the potential for more. 
4. The PBoC is now going to cover 100% of the principal for loans to local governments for the purchase of unsold homes – up from 60% when the initiative was announced earlier this year. 
5. Upcoming cuts to outstanding mortgage rates of 50 basis points. 
6. Cutting the minimum downpayment for second home buyers from 25% to 15%. 

• The Politburo subsequently met and issued an updated readout, focused on the economic situation:

1. Leadership acknowledged the scale of the economic issue and noted the need "to intensify the counter-cyclical adjustment of fiscal and monetary policies" and "ensure necessary financial expenditures".

More Details on Fiscal Policy Are Needed to See If this Will Be Enough

• The type of problem the economy is facing is notoriously tricky to navigate. 
• First, despite falling interest rates, credit demand in the domestic economy is weak. New RMB denominated bank loans are down year-on-year (y/y).
  
  • This isn't surprising as property values languish, and consumer confidence remains in the doldrums. 
• Moreover, economy wide deflation is now in its fifth consecutive quarter (negative y/y GDP deflator readings). Falling prices make loans more burdensome, further weighing on credit demand.
  
  • The weak pricing power is completely sensible given the context of an economy with very weak consumer confidence, weak loan demand, and a policy-driven focus on increasing economic capacity. 
• The conventional recommendation is to make credit cheap and try to revive the "animal spirits" in the economy through ambitious, demand-side, policy action.  This is notoriously tricky to pull off and why gradual policy moves were seen as unlikely to right the course. 
• This week's big announcements suggest that policymakers are turning to the more conventional approach. But we think the measures announced thus far will be insufficient to do the job. As more details come, we will be keenly watching for signs of a turnaround.

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