Is China’s fresh stimulus sufficient to support its ailing economy and markets?

China's central bank unveiled a broad package of monetary stimulus measures, including a cut in interest rates, to revive the world's second-largest economy. But will they be enough?

Chinese policymakers dominated recent headlines with a slew of announcements. Defying market expectations of the previous more gradualist approach, incremental easing policies were announced and implemented quickly. The People’s Bank of China (PBoC) has also given clearer forward guidance on further easing, signalling greater resolution to not just meet this year’s growth target, but also use more effective policy tools to stabilise economic growth momentum and support capital markets and the property sector.

The measures, exceeding investor expectations, include cuts to the reserve requirement ratio (RRR) and benchmark interest rates, reductions in outstanding mortgage rates, and introduction of new monetary policy tools aimed at stabilising the stockmarket.

The PBoC has also provided much-needed support to the struggling property market, while mitigating impact on banks. For example, 100 per cent of the Rmb300bn ($43bn) allocated for home repurchases can now be directly used, up from the previous 60 per cent limit. This change is expected to lower funding costs and make rental yields more attractive in many cities. The PBoC also stated that existing mortgage rates and the down payment ratio for second homes will be reduced, easing the burden on homeowners and alleviating pressure in the secondary housing market. These are all positive steps towards restoring consumer confidence.

Clear guidance

Looking forward, PBoC governor Pan Gongsheng has given clear guidance and signalled potential for further RRR and rate cuts, if appropriate. This clear communication on monetary policy is welcomed by markets and we expect Beijing to continue further easing, especially after many central banks in developed markets have started their own easing cycles. This gives the PBoC more room to do the same while still maintaining exchange rate stability in the medium term.

China’s politburo meeting in September also discussed the economic situation and policy outlook, which is a rare occurrence. Typically, meetings in January, April and July would have a greater focus on economic agendas, so this additional meeting in September calling out for more easing to meet this year’s GDP target is a very strong policy pivot back to growth supporting measures.

In contrast to April and July, this latest policy statement focused on addressing weakening domestic demand and sectors needing more policy support, including consumption, real estate, the private sector, capital markets development and the employment situation. By pledging more support to these areas, the statement signals the policy pivot from delivering more supply side stimulus – leading to wider divergence in the growth patterns – to a focus on rebalancing and stabilising the economy to achieve its annual growth target.

Larger impact

The aim is currently on effectively implementing and recalibrating earlier easing measures to create a larger impact. More incremental easing could be forthcoming to reinforce positive momentum, particularly fiscal policies. If we have incremental fiscal easing announcements in coming days to address local government debt and additional spending to boost growth, it will be effectively preventing downside growth risks.

We believe these measures are positive surprises to markets, supportive of short-term sentiment. They signal the importance China places in supporting domestic demand. These policies have not signalled a change of course. Indeed, they are part of a coordinated effort to restructure the economy, with a smooth transitioning to achieve high quality growth via controlled stabilisation.

The new measures implemented by the People’s Bank of China (PBoC), including cuts to the reserve requirement ratio (RRR) and key policy interest rates, mark a significant attempt to stabilise the world’s second largest economy.

However, these actions, I believe, are unlikely to reverse the ongoing economic slump or meet the ambitious annual growth target of around 5 per cent.

The measures reflect the pressing challenges facing China, including a struggling property market, and declining global demand.

While they signal a proactive shift, they will not be sufficient on their own to counter deeper economic issues that persist.

The reduction in the RRR has injected liquidity into the banking sector, encouraging lending and stimulating investment and consumption.

At the same time, the interest rate cuts will lower borrowing costs, providing relief to businesses and consumers. Market reactions have been cautiously optimistic, with Asian stocks seeing gains and European markets and Wall Street both posting gains. Indeed, both the S&P 500 and the Dow both secured record highs on the news.

However, these short-term market responses do not guarantee sustained recovery.

Additional monetary easing will be necessary in coming months. China’s inflation rates remain relatively stable compared to other major economies, allowing the PBoC more leeway to lower interest rates without triggering significant inflation.

As other central banks globally adopt rate-cutting cycles, China has the opportunity to maintain its competitive edge.

Further rate reductions could alleviate pressures in the beleaguered property sector by enabling developers to refinance debts and making mortgages more accessible for consumers.

Additionally, small and medium-sized enterprises would benefit from lower financing costs, fostering entrepreneurship and stimulating domestic demand.

Missed opportunities

Nevertheless, monetary policy alone is insufficient for robust recovery.

To achieve meaningful growth, substantial fiscal stimulus is essential. Despite the aggressive use of monetary tools, Beijing has yet to announce a large-scale fiscal stimulus package, representing a missed opportunity.

Fiscal stimulus would directly support growth through increased public spending on infrastructure, tax cuts and incentives designed to boost consumer spending. A targeted fiscal approach could address the current demand shortfall by injecting much-needed funds into the real economy.

Investments in infrastructure would create jobs and enhance long-term growth prospects, while tax relief would provide immediate support to businesses and households, encouraging spending and investment.

Moreover, the combination of fiscal stimulus and further monetary easing would create a powerful strategy to drive recovery.

Such a multifaceted approach is essential for revitalising China’s lagging economy, especially as global investors have remained hesitant to re-enter the market in recent years.

Small step forward

While the PBoC’s recent actions are a step forward, the journey to recovery is far from complete.

A more aggressive and balanced policy response is necessary to rekindle international investors’ interest in China. The upcoming months will be critical, and the need for a comprehensive strategy is urgent. Without a cohesive plan that incorporates both monetary and fiscal measures, the goal of sustainable growth will remain elusive.

As we approach the final quarter of 2024, the stakes are high. The potential for economic recovery exists, but requires decisive and coordinated efforts from both the central bank and government. Only by addressing deep-seated root causes of current economic challenges can China hope to restore investor confidence and stimulate growth in a sustainable way.

Looking ahead, I’m confident China would emerge stronger and more resilient than ever should these next steps be delivered in a timely manner.