China’s massive stimulus is missing a key ingredient: a way to revive the nation’s consumers

hinese President Xi Jinping, also general secretary of the Communist Party of China Central Committee and chairman of the Central Military Commission, delivers an important speech at a meeting celebrating the 75th founding anniversary of the Chinese People’s Political Consultative Conference CPPCC in Beijing, capital of China, Sept. 20, 2024. (Photo by Xie Huanchi/Xinhua via Getty Images)

China’s latest stimulus blitz offers everything but one key fix: new incentives to revive consumers.

In a rare press conference on Tuesday, Beijing demonstrated fresh resolve to reverse the country’s economic malaise. An adrenaline shot worth of policy was announced, ranging from mortgage financing to lower interest rates and reductions to the reserve requirement ratio.

JPMorgan estimates that the latter will inject around 1 trillion yuan into the country’s banking system. That’s alongside other liquidity support and plans for a stock stabilization fund.

Markets have lauded the measures as a step in the right direction and a meaningful improvement compared Beijing’s piecemeal support initiatives thus far. The country’s equities have ballooned on the news, leading to the largest weekly rally since 2008.

But economists, though also encouraged, warn not to overestimate what these policies can achieve.

“Although the numbers sound big and the efforts seem wide-reaching, this stimulus announcement alone may not be enough to bring the entire Chinese economy out of the doldrums,” Liz Young Thomas, Head of Investment Strategy at SoFi, said in written commentary.

Want change? Help consumers

“This economy has many deep, structural, fundamental problems that cannot be turned around just simply by a stimulus package,” Tianlei Huang told B-17. “I think it’s probably a bit too early to celebrate.”

The Peterson Institute for International Economics research fellow explained that Tuesday’s stimulus boost will be offset by the country’s major fiscal contraction. The government has simply not spent enough on consumers, even though an economic recovery depends on them.

A lack of domestic spending sits at the crux of China’s turmoil: consumers are so savings-oriented that China is fighting a deflation spiral. Meanwhile, buyers don’t want to touch real estate, a sector so big it makes up as much as 30% of the nation’s GDP, Huang said.

Despite its size, the market suffers from debt, defaults, and unsold inventory.

In Huang’s view, Beijing needs to start spending more on people rather than its consistent focus on areas like infrastructure. Addressing the housing downslide might also boost confidence, given how many individuals depend on the market for work.

While Tuesday’s stimulus package didn’t address fiscal support, Chinese officials appear to be getting around to it. On Friday, Reuters reported that China plans to issue over $284 billion worth of yuan in special sovereign bonds — a move meant to shore up fresh stimulus.

That followed a day after Chinese leadership noted a need to support household consumption and a stable real estate market. These rare comments were made at the Communist party’s monthly Politburo meeting, Reuters said.

Meanwhile, Barclays cited that some policymakers have recently advocated for an even larger fiscal stimulus package, amounting to as much as $1.4 trillion worth of yuan, to be unleashed over two years.

The bank considers this a “bazooka” stimulus scenario, which would snap up housing surplus, prop up consumption, and continue to ease debt burdens and fund public services. By Barclay’s estimates, this could take GDP growth to 5% in 2025.

The scenario reported on Friday will trigger a milder boost, raising next year’s growth to 4.4%.

As to this year’s growth, economists have turned anxious that Beijing may miss its growth target of 5%. Even if China commits to bigger fiscal support in the near term, it could be too late to change things this year, Huang said.

He noted a lag between bond announcements and actual bond issuance. Winter is also around the corner, which can slow down activity in stimulus-targeted sectors, such as infrastructure.

“Sounds weird, but that was actually one of the major reasons why additional Treasury bond issued last year since October was actually not spent until earlier this year,” he said.

To be sure, fiscal expansion is not enough to entirely shore up consumer faith. Policies need to address why consumers are not spending, Bank of America wrote on Wednesday.

“We argue the key is to fix an increasingly prevalent problem to save China from the economic malaise — the lack of positive incentives at the micro level in both public and private sectors,” the bank said.

For instance, Chinese consumers are staying away from new housing projects even as China has introduced looser mortgage rates and downpayment rules.

Huang explained this on the fact that new construction is simply not getting finished, reducing fresh demand — some shoppers are waiting for years to receive their purchase. In his view, the government needs to be more direct in funding unfinished projects.