Can China’s Economic Stimulus Package Resuscitate its Ailing Economy?
People’s Bank of China in Beijing, China. Photo: AP Photo/ Vincent Thian
It is no secret that China’s economy has been stagnating. A deflationary spiral looming as the GDP deflator has declined for five consecutive quarters, and economic growth falling short of expectations—growing at just 4% nominal GDP, below the 5% target—the economy faces significant challenges. Economists and policymakers, including former central bank Governor Yi Gang, have called for “proactive fiscal policy and accommodative monetary policy” to “focus on fighting deflationary pressure” and reviving economic growth.
On Sept. 24, the Chinese government unveiled a massive stimulus package in an attempt to resuscitate China’s ailing economy. Key initiatives include cutting interest rates by 50 basis points for mortgage holders, a move projected to save homeowners 150 billion yuan ($21 billion). In addition, the People’s Bank of China (PBOC) lowered the reserve requirement ratio (RRR) by 50 basis points, expected to add 1 trillion yuan ($142 billion) in liquidity to the banking system.
To further boost the stock market, the government announced an 800 billion yuan ($114 billion) support plan, including 300 billion yuan to assist companies with share buybacks and 500 billion yuan to help institutional investors access funds by allowing them to use riskier assets, such as stocks, as collateral for borrowing safer assets like government bonds.
Moreover, the Chinese government unveiled a plan to implement various expansionary fiscal policy instruments to boost consumption and investment, such as a monthly payment of 800 yuan to families for every child — excluding the first child— in a desperate attempt to not only revive the economy but also reverse the demographic catastrophe caused by the one child policy that ended in 2016.
Pan Gongsheng, Governor of the PBOC. Photo: AP Photo/Mark Schiefelbein
These measures were welcomed by markets, causing the CSI 300 index of big Chinese companies to soar by 15.7% this week, marking their largest gain in a single week since 2008. Though the news undoubtedly bodes well and signals China’s willingness to implement measures necessary to restore growth, many economists fear that these measures are not enough to revive China’s economy.
According to Robert Xing, Morgan Stanley’s Chief Asia Economist, the additional 2 trillion yuan increase in government spending falls well short of the 10 trillion yuan in stimulus needed for China’s economy to recover completely. Though these measures do provide some relief for businesses, they do not tackle the root cause of their low confidence.
As financial commentator Robert Armstrong stated, “The government’s rough treatment of entrepreneurs and crackdowns on foreign firms” has deterred private businesses, especially multinational companies, from expanding their operations in China. While reducing mortgage repayments would increase households' discretionary income, deflationary concerns could lead consumers to “save” instead of “spend” — ultimately rendering China’s recent financial initiatives ineffective in stimulating consumption.
Dr. Lu Xi at the Lee Kuan Yew School of Public Policy likewise argues that the real solution to increasing consumption may lie in expanding social welfare such as education, healthcare, employment – factors the Chinese Communist Party (CCP) vehemently opposes on ideological grounds.
Indeed, the government’s stimulus package is a step towards the right direction. To restore growth would require further fiscal measures, particularly through enhanced social welfare programs to stimulate consumption. Such measures will force the CCP to confront its disdain for handouts, which the party views as an encouragement of lazy behavior. Merely providing additional stimulus, however, is unlikely to solve the entirety of China’s financial problems. To rebuild business confidence, it has been encouraged that the CCP relinquish some power with the intention of creating an atmosphere that is more conducive to commerce.
Therefore, the fight to revive China’s stagnating economy requires more than scrupulous policymaking. It requires the CCP to fundamentally re-examine its priorities: to hold onto power in the short-run by asserting its power over businesses, and lose out in the long-run, or to surrender control now and reap the rewards tomorrow.