China Economics: Ten Stimulus Questions

A new note from Chief China Economist Xiangrong Yu answers the top 10 questions posed by investors about China’s stimulus package.

1. What happened?

A long-awaited policy shift may have arrived for China’s economy and markets.

On the monetary-policy front, the People’s Bank of China (PBoC) implemented a 50-basis-point (bp) cut to the reserve requirement ratio (RRR) and a 20-bp policy rate cut, two days after it cut the medium-term lending facility rate 30 bps. The PBoC then unveiled a plan for mortgage repricing, with outstanding mortgage rates potentially to be lowered to 30 bps below the loan prime rate before the end of this month. And forward guidance indicates another RRR cut of 25 bps to 50 bps within the year.

For fiscal policy, while concrete details haven’t materialized, the Politburo vowed to strengthen “countercyclical adjustments of fiscal and monetary policies” and deploy “necessary fiscal spending.” We now see a higher probability of an interim budget revision to add stimulus.

Regarding the property sector, the PBoC fine-tuned its relending tool to support government buybacks by raising the coverage ratio while keeping the interest rate unchanged, and it cut the floor for the second-home down-payment ratio. In a bit of unprecedented guidance, the Politburo explicitly vowed to “stop property-market decline and foster stabilization.” Tier 1 cities then followed up by either lifting or substantially easing purchase restrictions in Guangzhou, Shanghai and Shenzen.

2. Is this time different?

We’re more inclined to think so. Previous rounds of monetary easing failed to deliver results because strong liquidity supply doesn’t address the fundamental issue of weak credit demand. This time, though, we think demand-side measures are finally coming through. The sense of urgency is clearly rising among China’s top leadership, with the economy the first priority now. Moreover, policy credibility would be seriously undermined if the cycle of hope and disappointment repeats itself this time. Fiscal stimulus is late but appears to be finally moving alongside the policy efforts, with the Politburo’s meeting potentially marking a shift in thinking. The Politburo’s vow to stop the property sector’s decline marks a new, strong and decisive key performance indicator for economic and local officials.

3. What should we expect on fiscal policy?

We expect meaningful fiscal follow-up measures before the end of October and note that investors will lose patience if they aren’t delivered. If overall policy thinking has changed at the top, we see little reason for the Ministry of Finance to wait. The ministry could tap into some RMB5.1 trillion in funding without additional approval, though a budget revision is a touchstone, and a timely and sizeable budget revision or a new quota for ultra-long special Chinese government bonds (CGBs) of more than RMB1 trillion could offer more policy space. A tilt toward consumers in funding usage could be a further confirmation of a fiscal pivot, with direct and forceful support needed to stop consumer confidence from falling further. Large tax cuts may not be an ideal option with households and entrepreneurs unlikely to consume or invest; an expansion of expenditures is more essential for consumption, investment, bank recapitalization and local debt relief. Monetary easing and flush liquidity will also allow the ministry to make bolder moves.

4. What consumer stimulus is plausible?

We foresee a higher weight of consumption in the potential fiscal stimulus. With household confidence close to an all-time low and retail sales growing at merely ~2% year over year, it’s time for a direct consumption boost; we expect a package of around RMB3 trillion. Trade-in subsidies for autos and durable goods could continue or be stepped up, consumer vouchers for targeted sectors look increasingly likely, and consumer services could get more policy attention. The government is also set to strengthen the social safety net: We think the chances are good that unemployment benefits will be raised for middle-aged, disadvantaged and long-time unemployed people; subsistence allowances could also be enhanced. Another effort that looks increasingly likely is cash handouts to targeted groups. And policymakers could be more cautious about rolling out negative policies, such as consumption and property taxes and regulatory policies that disrupted income growth and wage expectations.

5. Is there still room for investment stimulus?

We do see scope for more infrastructure investment, though not at the same scale seen after the Great Financial Crisis. The property sector is going through a structural downturn, with the land-property boom unlikely to return, but the green transition, high-end manufacturing and infrastructure upgrades could benefit from more investment. The tight grip on local debt also needs to be loosened to capture upside for investment. Stringent local debt control and project approval are largely responsible for lagging bond issuance in 2024 and softening fixed-asset investment momentum. But we think the Politburo’s guidance will tilt the balance toward supporting growth and away from debt resolution, easing the bottleneck for infrastructure financing.

6. What will it take to stabilize the property market?

We don’t see a quick fix to property challenges, and stepping up existing measures may not be enough. The scope for demand-side easing could be much narrower now. Home sales responded only briefly to earlier easing efforts, though the impact of the latest easing in top-tier cities remains to be seen, with Golden Week sales the first test. Tighter control of new home supply and revitalization of idle land parcels, as promised by the Politburo, would only limit new supply. Digesting existing projects on the market will depend on the PBoC’s RMB300 billion relending tool for housing buyback, and it’s unlikely to have a sizable impact.

What would be a game changer would be large-scale public funds to make housing buybacks really work — and this approach may be the only way to quickly restore the supply-demand balance. The Politburo has ample reason to step in directly and provide interest subsidies and/or down payments, with the money coming from government bond issuance or from development banks. In any case, the buyback initiative can’t work without the support of public funds.

7. How much does equity-market support matter?

We agree with Beijing’s assessment that the stock market is more of a solution than a problem of the Chinese economy. If successful, efforts to boost property and capital markets could reverse the negative wealth effect for middle-class families seen over the last few years. We doubt the PBoC’s involvement will extend beyond liquidity support, however, and follow-up actions to aid the economy would matter much more than direct measures to support markets. The success of equity-market support greatly hinges on upcoming fiscal stimulus aimed at fixing China’s fundamental economic problems.

8. How to reconcile bank recapitalization and local debt relief in the whole picture?

Bank recapitalization is clearly in the pipeline as a semi-fiscal policy, with Bloomberg reporting that the government is considering injecting RMB1 trillion in capital into the Big Six banks by issuing special CGBs. Such a move would help keep systemic risk concerns at bay and make room for countercyclical policies; the capital replenishment could provide a boost to the banking system and make room for monetary easing, given net interest margin concerns. Local government debt relief is also a realistic option.

9. Are you ready to raise GDP and inflation forecasts?

We’re holding on until we see if policymakers walk the talk. The fiscal mix will do a lot to decide the growth impact, and weak confidence could lessen the impact of consumer stimulus. Chinese households’ saving rate is as high as 36%, and a rebound in confidence could lead those households to tap into their deposits for spending, fueling a broad-based rebound instead of the current broad-based slowdown. We’re relatively comfortable with the growth impact from public investments, and think bank recapitalization and local debt relief’s direct impact on growth could be limited.

We maintain our 2024 GDP forecast at 4.7% year over year, with the picture for 2025 still rather uncertain. And escaping deflation may not be quick or easy. The CPI reflation outlook hinges on domestic demand and particularly on consumer confidence; for industrial deflation, current overcapacity could prove a stubborn problem, one that’s only been addressed through minor efforts so far. We think the key is to incentivize local officials — it takes good implementation for good policies to have good impact, and local officials may be shouldering all the responsibilities. For example, stimulating the local economy through borrowing helps address the growth target, but debt concerns could surface later, and local officials are held accountable for local debt.

10. What should we watch going forward?

The next few weeks are a crucial window for both policy announcements and implementation. The window for delivering policy on property could be very short, as we see it. Potential measures include relaxing purchase restrictions in other top-tier cities, further credit support for developers and any further adjustments for government buybacks. On the fiscal front, implementation room is still available within the approved 2024 budget, and there’s a potential budget revision at month’s end, with earlier hints at this direction possible.

Any discussion in the last two months of the year could be more about 2025, which brings a long list of open questions, from who will win the U.S. elections to the 15^th Five-Year Plan and the 2035 target. We would look for more policy clues from December’s Central Economic Work Conference.