In the September of 2024, the central bank of China announced its most aggressive measures since the pandemic. These measures aim at getting its economy back on track. As per Kavan Choksi, recent stimulus measures of China have primarily targeted its monetary policy. It puts more emphasis on banks and money supply instead of “spending its way out” of a downturn.
Kavan Choksi provides an insight into China’s mega stimulus package
In September, the government of China announced a new stimulus package. The package included a 5% cut in bank reserve requirements with the exception of small banks. It also included cuts to key interest rates, as well as central government loans to local authorities to buy up unsold real estate assets. As per the stimulus, the capital needed to buy a second home went down from 25% to 15%. The People’s Bank of China (PBoC) shall additionally provide 800 billion yuan, which shall be about USD 113 billion, of liquidity in order to stabilise the equity market. This package includes a new 500-billion-yuan facility to make it easier for institutions to access funds for stock purchases and a 300-billion-yuan re-lending program to expedite the sale of unsold properties.
China’s stimulus package involved lowering mortgage rates for existing homeowners and reducing the reserve requirements for commercial banks. This is expected to inject roughly 1 trillion yuan (A$210 billion) into the financial market by enabling increased lending capacity.
On the face of it, the stimulus measures of China can considerably help in containing the balance sheet recession, as well as the deflationary pressures that have impacted the Chinese economy. They shall support asset prices in particular. They are likely to not trigger a new credit cycle in the private sector, either for households or businesses. Such an outcome is expected based on the lessons learned in Japan where the private sector went into a combined savings surplus in the mid-1990s, and zero or even negative interest rates did not help rekindle demand for credit from the private sector. Therefore, while Chinese authorities are relieving deflationary pressures, they would certainly not reverse them. Hence, this essentially is a step in the right direction. However, it also has to be accompanied by a new fiscal policy of transfers from public to over-indebted private balance sheets.
As per Kavan Choksi, measures taken by the government in China do show a resolve to support market outcomes. Initiatives of certain local governments could eventually sentiment in the property market over the year, if they manage to translate to higher new home sales, higher prices and reductions in inventory.
Broadly speaking, the announcement of stimulus in China complements the macroeconomic scenario of a soft landing for the United States economy. The labour market of the United States has cooled, and inflation in the economy has normalised towards 2%. The Western central banks are also gradually normalising interest rates and have confidence that the inflation is anchored to their target of around 2%. The decision of the Federal Reserve to cut rates by 50 basis points (bps) recently did not arouse any such concern.
