Why China’s massive stimulus effort might not have any effect until next year

The effects of China’s recent stimulus package probably won’t start kicking in until 2025, one researcher says.

China’s massive stimulus package may not have any direct effect until 2025, and Tianlei Huang, a researcher for the Peterson Institute for International Economics, says Beijing needs to do way more to boost its ailing economy.

In a note on Tuesday, Huang weighed in on China’s latest monetary stimulus package, which includes cutting interest rates, reducing reserve requirements for banks, and injecting about $114 billion in liquidity support.

Those measures sent Chinese stocks into a historic rally last week, yet they may not be enough to drive a full recovery of the country’s economy, Huang said.

Lower interest rates, for one, may not entice households and businesses to borrow or banks to ramp up lending, given China’s already-sluggish economic environment. That means some of the stimulus flowing toward banks may end up going back toward the government, Huang speculated, as banks could sow the funds into government bonds.

Lower rates may also not be enough to nudge China’s property market into recovery mode. Many households stopped seeing housing as a “preferred asset class” amid the nation’s property crisis, something that will be hard for policymakers to undo, Huang added.

“The central bank’s interest rate cuts and other policy moves could be ineffective—’pushing on a string’—at a time of weak credit demand, as monetary easing during a downturn does not always work as well as tightening during a boom,” Huang wrote.

“Moreover, the steps announced so far do not address the deep-rooted problems in China’s economy that weigh on its growth, including Beijing’s increasing prioritization of national security over economic development, its discrimination against the private sector, and its inadequate fiscal policies,” he added.

In particular, Beijing needs more fiscal stimulus to go alongside its monetary stimulus measures, Huang said.

But additional government spending likely isn’t coming anytime soon. The nation is poised to go “significantly short” on spending in its budget this year, he said.

Beijing has an option of making a midyear budget adjustment at the National People’s Congress Standing Committee meeting in late October. But given lags in the legislative process, any additional funds probably won’t open up until the of the year, Huang said, and they probably won’t be spent until the spring of the following year.

“The direct effect of such a fiscal stimulus may thus not show up until next year,” he wrote. “The indirect effect of such efforts—namely, increased confidence of firms and households, leading them to boost investment and consumption—is likely to be more important.”

Experts have said that China’s economic problems could stick around for the long term given some of the nation’s deep-rooted issues, like its population decline. At the current pace, Beijing is on track to lose half its population by the end of the century, a 2023 estimate from the Terry Group found, which is likely to significantly crimp economic growth.