Market jitters continue as China steps up economic stimulus measures

“The stimulus policies are finally headed in the right direction and increasing in strength.”

This is the sentiment unanimously held by several academics and economists I recently interviewed. Over the past two weeks, stimulus measures have been emerging across various sectors in China stronger than ever.

Firstly, in the real estate sector, which people are most concerned about, the two first-tier cities of Beijing and Shenzhen have relaxed home purchase restrictions around the time of the five-day May Day holiday, while popular second-tier cities such as Hangzhou and Xi’an have even removed all purchase restrictions, prompting a new wave of policy relaxation.

It was also reported this week that the central government is considering requesting local governments to buy unsold homes to help clear excess housing inventory.

Meanwhile, the rules for the trade-in subsidy targeted at boosting car sales were released in late April, stipulating that consumers who trade in their old vehicles and buy a newer model will receive a one-time subsidy of as much as 10,000 RMB (US$1,380). Over 50 Chinese cities are also applying the same trade-in measure to the property sector, encouraging residents to sell their second-hand homes to state-owned companies and buy new ones.

Also, the issuance plan for China’s 1 trillion RMB of ultra-long special sovereign bonds announced during the Two Sessions in early March has also been finalised this week, with the first batch of 40 billion RMB of 30-year bonds to be issued on 17 May. Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group, predicts that the bond sales will bolster China’s GDP by one percentage point this year.

Since the end of last year, economists and academics have constantly urged the Chinese government to ramp up stimulus especially in the persistently weak consumer spending and the real estate sector, which has been a serious drag on the economy. The Central Economic Work Conference held at the end of 2023 also mentioned expanding domestic demand and steadily addressing risks in the real estate sector.

But in the months that followed, relevant policies were just empty talk, with no clarity in either its entry into force or the actual implementation plan. A consumer analyst told me bluntly last month that “the market is no longer hopeful about bigger stimulus policies”.

The source of this recent spate of long-awaited stimulus policies can be traced back to the Politburo meeting of the Chinese Communist Party (CCP) on 30 April. Apart from deciding when the long-delayed third plenary session of the 20th CCP Central Committee would be held, the Politburo meeting also announced several new and more specific economic policies.

When discussing overall economic strategies, the meeting highlighted the importance of prioritising efforts to efficiently implement established macroeconomic policies. When it comes to bond issuance, the meeting urged that ultra-long special treasury bonds should be issued at an early stage and put to good use. In terms of expanding domestic demand, it stressed the need to advance large-scale equipment renewals and trade-ins of consumer goods. In terms of the property sector, it proposed for the first time the need to “digest” housing inventory and optimise policies on new housing supply.

These statements not only offer clearer guidance on the direction of stimulus efforts in various areas, but could also imply the reason why the third plenary session was postponed.

At a time when China’s economy faces intensifying internal and external headwinds, CCP higher-ups need more time to study the situation, sort their thoughts and reach a consensus on the course of economic development and the direction of reform for the next five to ten years.

Some analysts believe that the recent return of economic policy to a path of respect for market laws suggests that the people in favour of reforms and the market have regained the upper hand in high-level policy debates.

Regardless of the reason, the stepping up and enhancement of stimulus policies have indeed given the property market a boost. But observers also pointed out that the move was a step behind, and policies were implemented much later than market expectations, which could greatly diminish the effectiveness of its execution.

For example, the impact of the continued decline of the property market on the economy last year was evident, but purchase restrictions for popular second-tier cities were only greatly relaxed after Q1 2024 — until today, purchase restrictions for Tianjin have yet to be lifted completely.

As of April, home sales value for the top 100 Chinese developers was still 12.9% lower than March, a sign that the property market has not stemmed the declining trend. Most analysts predict that the sluggish demand would continue until at least the latter half of the year. Even as China’s Q1 GDP exceeded expectations, and even as international financial organisations such as Goldman Sachs, Morgan Stanley and the Asian Development Bank raised their projections for China’s economy this year, most economists currently still forecast growth of less than 5%, which falls short of the goal set by Chinese officials. That is to say, there is a need for policies to be further strengthened in order to ensure that economic growth this year can meet the goal.

The good news is that the Chinese government still has some ammunition in its policy toolkit that they have not used; one can glean this from the measures raised in the Politburo meeting that have yet to be implemented. This includes “flexibly employ[ing] policy tools such as interest rate and reserve requirement ratio to increase support for the real economy”, which means that there is still room for the central bank to reduce interest rates.

Another is “[thoroughly implementing] the plan for local governments to resolve debt risks… ensuring that provinces, cities and counties with high debt risks not only effectively reduce their debt burden, but maintain stable development as well”, which is a sign that the central government would continue to increase support for the local governments’ debt repayment.

However, what the market is more worried about is that as economic performance stabilises, the policymakers might not continue to step up with policy stimulus, or could even roll back on some policies. This could once more sink confidence and expectations, which had just stabilised.

Figures for the balance of narrow money (M1) in April released last weekend showed a decline of 1.4% year-on-year, with social financing down quarter-on-quarter for the first time, highlighting low business confidence and weak demand. However, China’s central bank on 15 May kept the medium-term lending facility (MLF) rate unchanged, which reduced market expectations for a lowering of interest rates and reserve requirements in the short term.

Although various economic indicators recently point towards a recovery, Washington announced this week that it would raise tariffs on US$18 billion worth of Chinese goods, issuing another warning sign to Beijing to not let its guard down when it comes to economic risk during this election year.

Policies that come somewhat late will naturally take a hit in terms of its effectiveness, but for the market, it is better late than never — it would be worse if it is implemented late and retracted early. Market confidence has already been greatly eroded while waiting for support from the policies; it cannot bear to take another blow.

This article was first published in Lianhe Zaobao as “迟来的刺激政策”.

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