At present, global interest appears to be focused on geopolitical tensions in Ukraine and the Middle East and the evolution of interest rates in the US and eurozone, as well as the presidential election race between Kamala Harris and Donald Trump. However, the effects of the economic measures recently announced by the Chinese authorities may prove more decisive.
In recent decades, China has made tremendous progress, achieved impressive economic growth rates and made leaps in technology and poverty reduction, thus enhancing its geopolitical importance.
More recently, however, challenges have been mounting. The business climate is at historic lows, stock market values appear to be stuck at 2019 levels and achieving the initial 5 per cent GDP growth target for 2024 seems unattainable.
With this in mind, the Chinese authorities decided to intervene drastically, in order to boost the economy. On the 24th of September, the People’s Bank of China announced what may be characterised, by traditional standards, as bold economic measures. The stimulus package, the largest since the pandemic, was initially welcomed by economic analysts and included the following measures:
- Reduction of short-term lending rates, from 1.7 to 1.5 per cent
- Channelling of over $100 billion of liquidity injections to bolster the equity markets
- Reduction of the reserve ratio requirement, i.e. the amount of liquid assets held by banks, from 10 to 9.5 per cent
- Decrease of the average interest rates on existing mortgages, by 0.50 per cent
- Reduction of the down payment for the purchase of a second home, from 25 to 15 per cent.
The announcements had an immediate and substantial impact on stock indexes, leading to third-quarter gains for the Hang Seng and Shanghai Composite, rising by 22 and 14 per cent respectively.
The measures were also expected to have a positive effect on the manufacturing industry, as well as on China’s battling real estate sector. Furthermore, given the size of the Chinese economy, a positive impact was expected for the global economy, particularly for sectors such as automotives, artificial intelligence and key raw materials for renewable energy sources.
However, over the last few days, there have been growing doubts about the adequacy of the announced measures. Many analysts have stated that, in the absence of even more substantial fiscal stimulus, it would be difficult to reinvigorate growth, which suffers from ongoing challenges, such as youth unemployment and deflationary pressures caused by the ailing residential property market.
Some analysts have been more vocal, calling for a diversification of China’s policy that is characterised by strong support and protection of domestic production. Other analysts also consider it appropriate to change the approach with respect to traditional sectors, such as investments in large infrastructure projects and real estate, which have led to the accumulation of high debts for local authorities and households.
While such pivotal changes in policy are unlikely to be observed any time soon, Chinese authorities did announced additional measures on October 15. Specifically, an additional $168 billion will be injected into the country’s capital markets, including a facility for stock purchases plus a re-lending programme aimed at unsold housing. Furthermore, there are indications that Beijing may issue ¥2 trillion in sovereign bonds to support local government debt and enhance social safety nets later this year.
Such aggressive action will help ease the cost of capital and support the local economy. In addition, a policy direction of partial easing of domestic industry subsidies, further opening up the Chinese market to foreign investors and suppliers, and stimulating private consumption, considering the country’s over-reliance on exports, would, in the view of many analysts, make it easier to contain the intensifying conflict between China, on the one hand, and the US and the EU, on the other, thereby contributing to the stimulation of global trade.
Andreas Charalambous and Omiros Pissarides are economists and the opinions they express are personal
