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The Latest Economic Maneuver by China
In the final days of September, China’s leadership took a significant step in economic policy. They unveiled an expansive suite of measures aimed at boosting confidence in their immense economy. Yet, this bold initiative has been met with mixed responses, as demonstrated by the initial market rally, followed by a downturn by October 8. Let us delve deeper into these developments.
The Measures Unpacked
China’s central bank announced a comprehensive suite of economic stimulus measures on September 24. These included lower interest rates and a reduction in the reserve requirement ratio (RRR). Such actions are designed to free up funds for banks, enabling them to issue more loans. With the first RRR cut, it released up to C$192 billion (1 trillion yuan) into the financial market, with the prospect of further reductions by year-end.
In a bid to rejuvenate the struggling housing market, 50 million households are set to benefit from reduced mortgage rates. Additionally, new tools are being introduced to stabilize stocks, such as swap and re-lending facilities. These facilities allow investors access to government bonds, which tend to be safer.
Moreover, six of China’s largest commercial banks might receive funds totalling up to C$192 billion (1 trillion yuan). This fund would facilitate more loans for property development, indebted local governments, and burgeoning sectors like modern manufacturing.
Political Scrutiny and Steps Forward
Highlighting the sense of urgency, the Chinese Communist Party (CCP) Politburo gathered for an early economic policy meeting. President Xi Jinping chaired the meeting on September 26. The group committed to necessary fiscal spending strategies to hit the GDP growth target of approximately five per cent for 2024. Addressing the property downturn, they emphasized improving market conditions and boosting consumption and employment.
The day prior, the Chinese State Council released guidelines concentrating on "high-quality and sufficient employment". This move acknowledges issues like the high youth unemployment rate, which reached nearly 19 per cent recently. As a progressive measure, the State Council also sanctioned a one-off cash allowance for those "in extreme poverty."
The Immediate Impact
Undoubtedly, these robust measures gave the domestic markets an initial lift. Internationally, U.S.-listed stocks of Chinese firms surged, reflecting a hint of optimism. Investors speculated that China might finally tackle its economic deflation, which has discouraged consumer spending. Standout market responses came from battered property developers, whose stocks soared amid the announcements.
Yet, previous policy relaxations in smaller cities did not yield the desired outcomes; residential property values dropped by 25 per cent year-on-year for the initial eight months of 2024. Hence, questions remain regarding the efficacy and reach of current measures.
Challenges on the Horizon
Unfortunately, some analysts argue that these latest efforts lack the aggressiveness of China’s 2008 financial crisis response. They point out missing decisive fiscal interventions that could provide sustained momentum. Long-standing, structural issues would require more profound economic rebalancing towards domestic consumption to cement progress.
Indeed, domestic tourist spending during the recent National Day was up by 7.9 per cent, a modest rise compared to 2019. Positive sentiment swiftly waned within a week after the stimulus announcement. Xi’s subsequent National Day speech and the National Development and Reform Commission press conference failed to introduce game-changing policies, causing disappointment.
Future Directions
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Adapting after Export-Led Growth
China’s electric vehicle sector saw a noticeable boost from the measures. However, industries like steel remain vulnerable, relying heavily on the real estate sector. As international scrutiny over Chinese overcapacity intensifies, especially in countries like Canada, the need to shift focus to domestic consumption has never been clearer.
By addressing these areas, China might steer its economy toward a more balanced and sustainably led growth path. Nonetheless, much depends on the timely and effective implementation of these plans.
