China’s stimulus falls short as economists warn of deeper structural woes

China’s latest attempt to stimulate its economy may not be enough to reverse the country’s downward trajectory. Economists warn that without bold, structural reform, the world’s

second-largest economy is set to continue its slump. A continued downturn and weak domestic demand could ripple beyond China’s borders, putting competitive pressure on multiple sectors as

the country’s companies settle for lower prices abroad. China launched a series of stimulus measures in September to revitalise the economy and boost the country’s ailing housing market,

including cuts to the reserve requirement ratio and seven-day reverse repurchase agreements.   To bolster the property sector, the stimulus package lowered existing mortgage rates and

reduced the down payment needed for the purchase of second homes. It also boosted funding support for the existing housing buyback scheme. Yet some economists believe revitalising China’s

ailing economy requires a targeted approach. Mark Williams, chief Asia economist at Capital Economics, said the focus by the Chinese government on stimulus is “misplaced”.   “China’s

problems are overwhelmingly structural — no amount of stimulus is going to absorb the spare capacity in industry or in housing,” he said.   Since China’s stimulus efforts, there have been

calls for a more radical approach to supporting the economy. Economists have suggested as much as Rmb10tn ($1.4tn) is needed via the release of special purpose bonds — considerably more than

the Rmb4tn issued following the 2008 financial crisis.  Williams explained that fiscal policy can help address structural weaknesses, but that the “measure of whether the leadership is

tackling the country’s economic problems should be how policy is directed, not the renminbi value attached to the package”.   In order to tackle the root cause of the issues, Williams

suggested the kind of measures needed include fiscal transfers from the central government to fund the completion of stalled but already-sold housing projects.   Louis Kuijs, Asia-Pacific

chief economist at S&P Global Ratings, agreed, saying “substantial action” needs to be taken to support the real estate sector, as measures so far are unlikely to turn it around.   He

suggested measures are needed to support developers’ funding conditions and to reduce the stock of unsold housing, which is now more than twice the average level recorded in 2008.   A boost

to consumption levels requires a “combination of substantial short-term stimulus with structural measures” for consumers to increase confidence, said Kuijs. He added that this may mean

material structural reforms around health, education, and social security to encourage greater levels of household spending.   For signs of support for consumption, Kuijs said to watch if

the official 2024 budget deficit is raised in early November, and the language used regarding fiscal policy for 2025 after the Central Economic Work Conference in December.  Williams

believes bank recapitalisation, dependent on the banks acknowledging the bad debt so that credit can be redirected towards productive companies would also help, as well as a long-term pledge

to boost the funding of healthcare and pensions.   A more direct approach from the government could improve economic prospects. Kuijs said in the current conditions, with soft confidence

and credit growth, fiscal policy would be more effective than monetary easing. “It is not so much about what [central bank] the People’s Bank of China will do but about what will happen to

fiscal policy,” he said.   He cautioned if the housing market is not turned around, China will continue to see weak domestic demand, and downward pressure on prices and profit margins. “The

risk of outright systemic deflation — with price and wage declines feeding on each other and dragging down activity — is likely to rise further,” Kuijs added.   Additionally, he added a note

of caution that a further downturn in China will have a contagion effect on other countries. With domestic demand weak, many companies have focused on exporting, and are willing to accept

reduced prices to sell abroad. Kuijs said this is putting major competitive pressures on many companies and sectors, resulting in growing calls for trade barriers against Chinese products.