Quick Bite | Is China Stimulus Pushing on a String?

In recent days, the sharp stock market rally in China has fizzled out as highly-anticipated announcements on plans to boost the country’s economy disappointed investors. Shares had jumped by over 10% as trading restarted after the Golden Week holiday but fell back after a news conference by the country’s economic planners.

After a volatile day of trading, the Shanghai Composite Index in mainland China closed 4.6% higher, while the Hang Seng in Hong Kong slumped by 9.4%. Investors had been hoping for more information about how the government plans to support economic growth, but the announcement gave little in the way of details.

The chairman of China’s National Development and Reform Commission said he is “fully confident” the country will achieve its full-year economic and social goals, but added, “The downward pressures on China’s economy is also increasing”.

The Chinese government has been trying to boost confidence in the world’s second largest economy as concerns increase that it may miss its own 5% annual growth target. But the fact remains that even disappointing growth will still be the largest contributor to world growth over the next 5 years, according to the International Monetary Fund (IMF).

Even if China slows, its growth still counts!

Source: Bloomberg

China’s problem is that although Beijing has been dismantling the country’s old property-driven economic model for 4 years, it has yet to devise a viable long-term replacement. At the peak of this now-defunct system, real estate – purchasing it, developing it, selling it, and all sorts of related activities – accounted for around one-third of China’s annual output.

Observers have long understood the dangers of this, especially because the country’s property economy was built on unrealistically cheap credit and unsustainably bullish sentiment. Xi Jinping was the first leader to take action when in 2020 he cracked down on excessive mortgage lending and started allowing property developers to go bankrupt.

Property prices are down roughly 10% in inflation-adjusted terms since 2020 (by one measure from the Bank for International Settlements). The property market is starting to function as it would in a normal economy, with prices likely to stabilise in the coastal cities where there is demand and still falling in inland areas in response to declining populations. Chinese appear to have gotten Mr. Xi’s message that “houses are for living in, not for speculation.”

Xi Jinping is clearly worried about the economy, but can he fix it?

The stimulus plans included help for the country’s crisis-hit property industry, support for the stock market, cash handouts for the poor and more government spending. But questions remain whether the policies will be enough to fix China’s economic problems. Perhaps more fundamental reforms might be needed in order to set the country on a more sustainable growth path. 

And yet, as confidence in China’s economy falters, we must remember that even modest-level growth off such a large economic base is enormous and will move the global economy. And every little bit of growth will be important for Australia. We need our major trading partner to prosper if we are to prosper.