Over the past two months, China has slowly unveiled details about a set of policies designed to stimulate its flagging economy. In early November, the central leadership released another piece of the economic stimulus plan. The announcement also suggested that further moves might be forthcoming – depending on what a second Trump administration might bring.
Economists often point out that fixing the economy is like steering a large ship: Quick course directions are particularly difficult to pull off. Here’s how China is hoping to recharge its $18 trillion economy – the world’s second largest – and why this has proved difficult to do.
Just before the National Day holidays at the start of October 2024 – which marked China’s 75th anniversary – the announcement of large-scale stimulus measures led Chinese stock markets explosively higher. New monetary policies, such as reducing the reserves banks were required to hold, aimed to increase the flow of funds into the economy. To bolster China’s troubled real estate sector, new policies included reduced interest rates for mortgages and rescinding purchasing restrictions in most localities.
Running up the stock market
Many of these new policies seemed designed precisely to goose the Chinese stock market. As is often the case when media reports and online forums share such expectations broadly, many in China start buying to get a piece of the action. The buying frenzy then creates the very boom itself, in a self-fulfilling manner.
Chinese leader Xi Jinping has been down this road before – and was burned by so transparently signaling that he wanted the stock market to go up. In 2015, similar signals from Xi’s statements sparked a quick run-up in the stock market, but the Shanghai Composite soon plummeted in value. Many investors were hit particularly hard, as they had borrowed money to buy stocks.
Something similar happened when stock markets reopened following the National Day holiday. By Oct. 9, China’s stock markets had given back nearly a third of the rapid gains they had just made. This drop was largely attributed to investors’ concerns about the scale and shape of the stimulus package that the government was pursuing, specifically in terms of fiscal policy. For the past month, the stock markets have been on tenterhooks awaiting the fiscal policy news.
On Friday, Nov. 8, some details finally emerged. The headline figure was a 10 trillion RMB ($1.4 trillion) fiscal package, yet that figure reflects mostly financial machinations rather than putting money in people’s pockets. To be sure, the expanded space for local governments to help resolve both official and hidden debts was sorely needed. But the hopes for cash for consumers were dashed.
Why are we talking about stimulus anyway?
China’s economy has an enviable growth record. While there remain significant debates about the weighting of different factors in its success, the overall trajectory from agricultural poverty to urbanized workshop of the world is obvious. Yet the economy has been slowing down for many years at this point, and with past performance comes heightened expectations.
As I wrote here a little over a year ago:
China’s economy in 2023 is hardly in great shape. Major property developers are teetering. Youth unemployment is so high that Beijing is hiding the data. And exports and the value of the Chinese currency, the RMB, are declining. Among Chinese consumers and investors, confidence in the economy is low.
In particular, the country has seen major shocks to the real estate sector, which has been a primary growth engine. To be clear, this was the central government making intentional moves to try to deflate a sector that had ballooned into bubble territory. Again, this is how the situation unfolded in 2023:
General Secretary Xi Jinping instituted policies – called the “three red lines” – to limit the debt that property developers could take on. In effect, the policies have led multiple developers – most famously Evergrande and currently Country Garden – to collapse, unable to pay off their massive interest bills. Yet rather than changing course by firing the “bazooka” of fiscal stimulus as it had in prior moments of concern in the real estate sector, the Chinese government appears prepared to follow through and actually deal with slower growth for a turn while the economy digests some of these problems.
China’s economy has yet to rebound
Now, apologies for the profligate metaphors, but 2024 saw much of the same. For China, unlike many other parts of the world, there was no big growth boom as factories and cities reopened after covid-era disruptions, particularly the late lockdowns that ended in late 2022 following protests against the Chinese government’s strict “zero-covid” policies.
The real estate market – which accounts for an estimated 70% of Chinese household wealth – remains weak. One piece that has changed is that deflation is no longer a far-off fear, but a major concern right now. Wages are substantially declining for the first time in the post-Mao era, and China must worry about avoiding a Japan-style debt-deflation spiral.
Eventually the relevant organs of authority inside the party and government came to an agreement that the Chinese economy needed some kind of stimulus. It was hardly becoming of a major power celebrating a major anniversary to limp into the future halfheartedly.
Why not simply boost consumer demand?
Many have questioned why the Chinese government is not doing more to give cash to consumers to stimulate spending, as other economies have done during the covid years. Despite his famous rhetoric of “common prosperity,” Xi remains deeply skeptical of “welfarism.” The shift in economic growth models away from real estate has mostly seen the government double down on high-technology industrial goods like electric vehicles, solar panels, and electronics, both for domestic consumption and export. And the Chinese government has for decades filtered stimulus through companies that it can control, rather than consumers.
However, the announcement last week made very clear that this may not be the end of China’s stimulus moves. Donald Trump’s campaign has constantly drummed a refrain of tariffs and more tariffs. China, which supplies nearly 17% of U.S. imported goods ($536 billion in 2022) is the target Trump mentions the most frequently for stiff U.S. import tariffs. And so perhaps it is not surprising that Chinese Finance Minister Lan Fo’an indicated that a more forceful stimulus – including fiscal policy – might be on the docket again in the new year.
The Chinese economy continues to move forward, not growing as rapidly as it had but also not collapsing. The recent spate of stimulus policies that have dribbled out of Beijing have disappointed some, but certainly helped avoid any serious economic collapse. For now, China continues to kick the can down the road.
Related Good Authority posts:
- Jeremy Wallace, “China’s 75th anniversary tries to downplay the struggling economy.” A conversation with UC San Diego professor Victor Shih in early October 2024, as China celebrated a milestone anniversary.
- Jeremy Wallace, “What China’s economic slowdown means for the world.” From September 2023, examining the post-pandemic and deeper challenges to China’s economy – and the tools the central government may use to reboot economic growth.
- Jeremy Wallace, “What Xi Jinping’s ‘common prosperity’ goal means for China.” A closer look at the implications of Xi Jinping’s August 2021 speech on the central government’s imperative to build China’s middle class, and diminish the significant income gaps between rural and urban areas.
- Susan H. Whiting, “China’s Evergrande is in trouble. But so is China’s top-down political economy.” From October 2021, when a major property developer faced bankruptcy – revealing the cracks in China’s “state capitalism” economic model.
- Dimitar Gueorguiev, “China’s top priorities? Here’s what Communist Party leaders say — and our poll results.” From March 2017, examining two decades of archive data on China’s provincial consultation process and central government guidance.
- Jeremy Wallace, “The political implications of China’s stock market crisis.” From August 2015, explaining the huge challenge for China’s government when the Communist Party leadership can no longer rely on economic growth to communicate its strength.
Further reading:
- Katie Martin and Aiden Reiter, “Transcript: Is the China stimulus package enough?” Financial Times, October 2, 2024.
- Josh Xiao and Phila Siu, “China’s Stimulus Blitz: What We Know So Far and What to Expect,” Bloomberg, September 30, 2024.
- Joe Leahy, Wenjie Ding, and Arjun Neil Alim, “China unleashes stimulus blitz to lift growth,” Financial Times, September 24, 2024.
- Joe Leahy, “China’s economic activity falters as challenges mount,” Financial Times, September 14, 2024.
- Yuen Yuen Ang, China’s Gilded Age (Cambridge University Press, 2020).
- Margaret Pearson, Meg Rithmire, and Kellee S. Tsai, “Party-State Capitalism in China,” Current History (2021), Vol. 120, Issue 827, pp. 207-213.
- Jeremy L. Wallace, Seeking Truth and Hiding Facts: Information, Ideology, and Authoritarianism in China (Oxford University Press, 2022).
