The package includes measures such as reducing banks’ reserve requirements and the key interest rate, as well as providing additional support to the market. Real Estate The troubled, as this step comes at a time when the global economy is witnessing a general slowdown, which makes these measures the focus of attention of observers and experts.
With economic forecasts indicating the difficulty of achieving China For growth purposes, the stimulus package raises questions about its effectiveness in stimulating the Chinese economy and its impact on global markets. What are the potential implications of this package for the global economy? Will it contribute to reshaping China’s economic growth path?
China has announced a wide-ranging package of monetary stimulus measures to revive its economy, indicating growing concern within the Chinese government about slowing growth and declining investor confidence, according to a report published by Bloomberg and reviewed by Sky News Arabia.
The governor of the People’s Bank of China, Pan Junsheng, signaled a cut in the key short-term interest rate and announced plans to reduce the amount of money banks must hold in reserve to the lowest level since at least 2018, appearing at a rare news conference alongside two other top financial officials in Beijing. It marks the first time cuts in both measures have been revealed on the same day since at least 2015.
That was followed by a series of other announcements that fueled gains in China’s battered stock market. The central bank chief also unveiled a package to support the country’s troubled property sector, including cutting borrowing costs on up to $5.3 trillion in mortgages and easing rules on second-home purchases.
Doubts about achieving targeted economic growth
For domestic stocks, Pan Junsheng said the central bank would provide at least 800 billion yuan ($113 billion) in liquidity support, and officials were considering setting up a market stabilization fund.
While many of the measures were expected by investors, the launch showed that authorities are taking seriously warnings that China risks missing its growth target of around 5 percent this year. The policy flurry could bring that target back within reach, but doubts remain about whether it will be enough to break China’s long-term deflationary pressure and entrenched property woes, the report said.
“It is difficult to say what is the magic bullet that can help solve everything,” said Ken Wong, Asia equity portfolio specialist at Eastspring Investments Hong Kong Ltd. “While it is good to have soft monetary easing measures, more needs to be done to help anchor growth in the fourth quarter.”
“The press conference is meant to inject confidence into the market, based on the fact that the authorities have unveiled one-off measures, and the stimulus push will continue to need coordination from other policies – especially follow-on policies on the fiscal side,” said Larry Hu, head of China economics at Macquarie Ltd.
“Monetary easing has been more aggressive than expected,” said Becky Low, head of macro strategy at Standard Chartered Plc. “We see scope for more aggressive easing in the coming months, following the massive rate cuts by the Federal Reserve.”
Improved Chinese economy supports European economy
In an exclusive interview with Sky News Arabia Economy, Amer Al-Shobaki, an international economic and energy consultant, said: “There are great hopes for the Chinese stimulus package. It is large and unprecedented, such that many investors in the world believe that it will address the imbalance in the Chinese economy, whether in the real estate sector, the stock sector, or other investments.”
The billions that will be pumped into the markets aim to maintain the targeted economic growth of 5 percent for the second largest economy in the world, and this is accompanied by quantitative easing trends, whether for the US Federal Reserve or the European Central Bank. We should also not forget that the improvement of the Chinese economy supports the European economy, which depends somewhat on some raw materials that are imported from China, according to his expression.
Al-Shoubaki pointed out that “with the announcement of this package, oil prices improved to rise by 2 percent, but with the geopolitical tensions in the Middle East and the Russian-Ukrainian war, recession fears still exist in the world, so this package needs some time to prove that it is effective, and this will become clear from the Chinese economic data that will be announced in the coming period.
The international economic and energy consultant believes that this stimulus package came at a very critical time as it is the latest Chinese attempt to confront the weakness or decline in the country’s economic growth. He said: “We do not know with this package what the West is preparing for China, especially with the upcoming US presidential elections and whether Trump is preparing for a new economic war with China. There is also geopolitical cooperation between the United States and many countries on the European continent to confront China’s economic ambitions in many areas, especially with China’s control over rare minerals that are important for industries in the world.”
China’s economic model reaches critical point
For his part, Dr. Abdullah Al-Shennawy, economic expert and professor of economics at Zagazig University, said in an exclusive interview with the “Sky News Arabia Economy” website: “The Chinese economic model has reached a critical point and is beginning to lose momentum as the Chinese economy continues to slow down, with all measures of industrial production, consumption and investment slowing more than expected. The unemployment rate rose to its highest level in six months in August at 5.3 percent, and the unemployment rate among youth in urban areas rose from 13 percent in June to 17.1 percent in July. There are many challenges facing the Chinese economy that were a reason or motivation for China to take the current stimulus package, which will in turn affect China’s global strategies later.”
Speaking about the challenges facing the Chinese economy, he said: “The first challenge can be in the sectors related to construction, real estate and infrastructure, which are currently stagnant, and the stagnation of these sectors has dire consequences for the Chinese economy. As of 2021, the real estate sector alone accounted for 25% of China’s GDP, 20% of financial revenues, stored 70% of household wealth, and received 25% of bank loans. So China must identify solutions to bridge the gap in GDP and job opportunities, and many of these solutions look abroad.”
The second challenge is China’s financial constraints, with high local government debts from overdevelopment of the property market, as well as increased loan defaults and repayment difficulties from previous Belt and Road Initiative projects. The third challenge is the other pillar of China’s economic growth so far: manufacturing and exports. China’s export industry is still largely assembly-based, with about 60 percent of China’s exports manufactured by factories wholly owned by foreign companies or Sino-foreign joint ventures. This points to a second weakness in China’s export portfolio: a relatively high degree of dependence on foreign countries, he said.
The professor of economics at Zagazig University pointed to the fourth challenge, which lies in the weakness of consumer spending, as the Chinese have become less willing to spend in light of the current economic slowdown, due to the weakness of the social safety net. Current consumption constitutes 53.4 percent of China’s GDP, which is much lower than the global average of 72 percent.
Growth Stimulating Scenarios
Asked whether the stimulus package would reshape the economy and achieve growth, economic expert Dr. Al-Shennawy pointed out that policymakers should elaborate on the stimulus package to revive the very large market, in its latest attempt to boost domestic demand, expand consumer spending, focus on economic policies that would improve people’s livelihoods and expand channels to raise housing income, and try to improve people’s welfare by improving the income distribution system, employment policy and social security system, and make efforts to improve long-term mechanisms to expand consumption, reduce relevant restrictions, and effectively promote the new economy.”
“Fiscal policies should be matched by the expansion of consumer loans by banks and promotional discounts by merchants, in an attempt to generate a quick synergistic boost to consumption power, and the adoption of expansionary monetary policy represented by reducing the reserve requirement ratio, which is considered to provide more space for the Chinese central bank to ease monetary conditions without putting significant pressure on the yuan,” he added.
The central bank’s near-term reduction of the amount of cash banks must hold in reserves — known as reserve requirement ratios — by 50 basis points would free up about 1 trillion yuan ($142 billion) for new lending. In the manufacturing sector, policy incentives supporting equipment upgrades are expected to drive investment in the sector significantly, generating stronger internal momentum for the Chinese economy by boosting industrial activity, according to Shenawy.
China should combine stimulus and reform measures to steer the economy toward an expansionary growth path, he concluded. This includes raising funds through the issuance of special ultra-long-term treasury bonds, aiming to generate a stimulus of at least 10 trillion yuan ($1.42 trillion) within one to two years, addressing gaps in basic public services, focusing on improving services such as affordable housing, education, health care, social security and pensions, and accelerating the development of small and medium-sized cities within urban areas.
