China is on the move, and this time, we think the stimulus package will do the job. Since late September, coordinated policy initiatives have targeted both cyclical and structural issues.
Endorsed by top officials, these measures can potentially reshape the economic landscape for years. GDP grew 4.8% year-on-year in the first three quarters of 2024 amid stiff headwinds from weak domestic demand and rising external uncertainties.
We forecast GDP will grow 4.9% this year, 4.5% in 2025 and 4.4% in 2026. Slower growth in the next couple of years will result from China’s structural transition towards a more balanced and sustainable growth model, which will take time.
Measures Announced
A joint press conference was held at 9am on 24 September before the A-share market opened. The line-up was impressive – the People’s Bank of China Governor Pan Gongsheng, the National Financial Regulatory Administration Minister Li Yunze, and the China Securities Regulatory Commission Chairman Wu Qing.
They announced a slew of easing measures: a 50bp RRR cut, a 20bp cut on the policy rate (seven-day reverse repo), and the rollout of a new monetary policy tool to provide a liquidity backstop for non-bank financial institutions to purchase A-share stocks, among others. These senior regulators also committed to providing unconventional forward guidance, including more RRR cuts in 2024 and expanding the new policy tool quota.
Well-coordinated Policy Play
The 24 September press conference “front-ran” the more important Politburo meeting on 26 September, signalling that top officials orchestrated the policy shift. The 24-member Politburo usually meets every month to discuss key socioeconomic issues, and the September meeting doesn’t typically focus on economic issues.
In another departure from convention, the Politburo also pledged to support those taking on the responsibility for the new policy initiatives to get things done. It conveyed a clear message – economic growth was the top priority, and a range of measures were in the pipeline to set the economy on a sustainable and high-quality growth trajectory.
Continuous Rollout of Supportive Policies
Since late September, there’s been a busy schedule of press conferences by various government agencies, as well as frequent policy rollouts, targeting support to the stock market, the property market, private enterprise, employment and domestic consumption. The frequency and magnitude of recent events are unusual, indicating a decisive policy turn towards supporting the economy.
Some policies are already having an impact. For example, the PBoC has implemented its RRR cut and rate cut, with the easing now filtering into the economy: large state-owned banks recently announced 25bp cuts to deposit rates, while both the 1-year LPR and the five-year LPR were cut by 25bp.
On 18 October, Governor Pan reiterated that the RRR might be lowered by another 25bp to 50bp before the end of the year (PBoC, 18 October). Other policies, particularly the much-anticipated fiscal package, took longer to unveil due to legislative procedural requirements.
The Fiscal Stimulus Package
The NPC Standing Committee, China’s top legislative body, on 8 November formally announced a local government debt swap totalling RMB 12 trillion.
Although the announcement can be seen as a disappointment if viewed in isolation from the broader stimulus package, it targets the pain point that may have slowed economic velocity. While there was no direct support for property and consumption, the announcement set the stage for alleviating local government debt pressure and letting the Government re-focus on economic growth.
For example: 1) it’s aimed at alleviating a systemic liquidity crunch rather than merely lowering borrowing costs for local governments; paying accounts in arrears unclogs the system as cash is injected into the system, enabling further payments down the line; 2) other than reducing the debt burden of local governments, fiscal reform is in the pipeline to resolve the revenue-expenditure mismatch, the root cause of the local government debt problem; and 3) other structural reforms are being planned to curb extraterritorial and profit-driven law enforcement by local governments, which are essential for improving the business environment and boosting business confidence.
Further fiscal support is also in the pipeline, as guided by the Central Government, including funding to recapitalise the six largest banks and for local governments to acquire idle land and unsold commodity housing.
Future Challenges and Opportunities
While we’ve seen many encouraging policy changes, domestic demand will still take time to regain strength. At the same time, the external environment is increasingly uncertain, with rising geopolitical tensions.
So, what will be the future growth drivers? China is eyeing a consumption-led, technology-driven, green transition to facilitate economic growth. The short-term policy anchor for consumption is direct subsidies for goods and services consumption. In the longer term, the goal is to build a better social welfare system and grant migrant workers comparable public services as their urban peers. Shifting toward a consumption-led economy should make China’s future growth more resilient and help create a virtuous cycle to enable effective investment.
Meanwhile, tech-driven growth is vital to boosting overall productivity, creating jobs and enhancing the nation’s competitiveness. China is making good progress in several new economic sectors. The Third Plenum promoted building a unified national market, with measures introduced to promote fair competition. By reducing internal barriers (such as local government protectionism), China aims to create an environment to foster innovation.
Lastly, the green transition will spur profound changes in economic institutions as a shift towards sustainable practices doesn’t just mean there will be cost savings but also lead to opportunities in new sectors, such as EVs, lithium-ion batteries and more.
What are the challenges? First, the transition may prove to be bumpy. For example, the housing sector is of systemic importance to China’s macroeconomy and has yet to stabilize. The good news is that we have seen a series of changes – from the further relaxation of housing purchase restrictions to the lowering of down payment ratios and mortgage rates to stimulate demand.
Supply-side measures such as urban village renovation and local governments’ acquisition of oversupplied commodity housing will also help. The Government still has room to roll out more support and will do more as needed. Geopolitical tensions may stay elevated, but China is adapting its development model to enhance resilience and engaging with foreign counterparts to mitigate conflicts and foster cooperation.
Overall, we are cautiously optimistic that this time is different. The structural transition is unlikely to be seamless and smooth, but the decisive policy shift signals a commitment to meaningful change and progress.
Jing Liu, CFA, Chief Economist, Greater China, The Hongkong and Shanghai Banking Corporation Limited