By Carl Tannenbaum

Increasing headwinds to China’s economy (including trade restrictions) led officials to announce another round of stimulus recently. But while the measures were cheered in the financial markets, they got a cool reception from Western economists.

Since the year 2000, China’s merchandise exports (in U.S. dollar terms) have grown at a compound rate of almost 12% per year.  Trade has been a central driver of China’s economic growth, which has averaged more than 8% annually over that time.  But the pace of expansion was falling even prior to COVID-19, and the post-pandemic trend of re-shoring has taken a further toll.  Chinese exports fell by 5% in 2023.

Already low relative to Western countries, household spending in China has fallen off in the last two years.  The pandemic increased precautionary spending, and losses on property investments have required some balance sheet repair.  While China’s reported unemployment rate has been stable, there is concern that it is understated.  Joblessness among young workers stands at 17%.

To keep activity from slipping further, Chinese policymakers have been increasingly active.  In the spring, they announced a series of measures designed to stimulate production.  Our coverage of that effort noted that it might be misdirected; pushing up output amid soft domestic and international demand can serve to increase the risk of deflation.  China’s producer prices have been declining for some time, and its consumer price index has increased very slowly.

On September 23, Chinese authorities announced another round of policy measures.  Interest rates were cut, and the reserve ratios that banks must maintain were reduced.  Down payment requirements for loans to purchase second homes were lowered.  Additional capital for banks may be made available to boost their ability to resolve losses and sustain lending.  Measures to encourage institutional investors to purchase equities were also introduced.  China’s stock markets welcomed the news, rallying by more than 25% in the two weeks following the announcement.

Economists were more guarded in their assessment.  Chinese households and businesses are seeking to control their leverage, so lowering interest rates may not prompt additional borrowing.  Promoting equity purchases may push prices further from their fundamental value; historically, experiences with financial stress do not improve until markets are allowed to fully correct.

Chinese authorities did allocate additional funding for state-owned enterprises to purchase vacant apartments and convert them into affordable housing.  The total size of the program remains well short of the depreciation in residential property markets, though, and participation in the program has been low so far.

Arresting declines in asset prices can have a favorable impact on public sentiment, which has been flagging in China.  For much of the year, Chinese investors have been flocking to the safety of government bonds.  The size and timing of the policy changes seemed to suggest that officials are very much aware of the challenges they are facing.  Some analysts are expecting further stimulus following the annual “Two Sessions” gathering next March, if not before.

China’s growth picture will not brighten without substantial assistance for domestic demand.  A prominent Chinese economist has proposed a program equal to 10% of China’s gross domestic product, which would be more than the spending done by the United States in the wake of the 2008 financial crisis.  A key difference, however, is that Americans were only too glad to spend the money given to them; incentives may have to be offered to Chinese households to overcome their preference for saving.

The acknowledgement of the depths of economic challenge by Chinese officials is a positive step.  But the journey to recovery will be long, and Western countries will continue to put roadblocks in the way.