China's Economic Recovery Plan: Enough to Restore Confidence?

The Chinese authorities created a surprise by announcing a series of measures to revive the economy, unprecedented in scale and nature since the start of the real estate crisis in 2021. The measures were initially greeted with enthusiasm by the Chinese stock markets, but one will have to wait for more information on their concrete content before their effectiveness can be judged in the longer term.

A full basket of fiscal and monetary measures

On Tuesday 24 September, the Central Bank (PBoC) showed the way with monetary measures including a cut in interest rates, particularly mortgage rates, theloosening of certain criteria limiting banks' ability to grant mortgages (which could lead to an injection of liquidity of up to 1,000 billion RMB - €127 billion - or almost 1% of China's GDP), and the introduction of financing mechanisms to make it easier for financial institutions to buy shares on the stock market. The very next day, the State Council published a list of measuresto encourage businesses to hire and local governments to facilitate the development of employment in their areas.

The press release itself is short on details, but leaks (probably organized) have suggested that the total amount of these bonds could be as much as 2,000 billion RMB. They also suggested that for the first time, direct subsidies to low- and middle-income households are also considered to support consumption - although at this stage, no further details on the amount or source of funding are available.

The relevance and innovative nature of the new measures

This is indeed a U-turn, and the tone of the Politburo communiqué and the measures themselves reflect a new sense of urgency. The central bank was quick to exploit the space opened up by the recent cut in US rates to lower Chinese rates. The approach of the National day on 1st October and the wish to announce good news also undoubtedly played a role, even more after the announcement of an increase in the retirement age, which was poorly received by the population. But beyond these circumstantial factors, the authorities have above all started to listen to and apply the advice given by a growing number of local experts and economists with increasing anxiety, and sometimes at their peril: coincidentally, it was learnt this very week that a well-known economist in China was dismissed from his post in April, apparently for having been a little too critical of the government's lack of action in the face of the continuing deterioration in the economic situation.

It is difficult at this point to judge the relevance of the measures announced. Some of the measures announced are a recycling of older initiatives, and others seem more symbolic and spectacular than genuinely effective, such as those concerning the stock market - a modest share of people's savings, unlike property. Some of the bond issues announced are intended to refinance maturing debts and therefore do not represent new funds. The decline in property prices has been artificially limited in many cities, and there is no indication that these prices have reached a level of equilibrium leading buyers to return, while property developers still have considerable stocks of unsold flats on their balance sheets. What's more, despite the introduction of consumer support measures, a significant proportion of the new bonds issued will in no doubt be used to finance supply-side rather than demand-side action - as in previous plans. Nor is there any indication that the authorities are prepared to abandon their plans to invest in high technology and the "new productive forces", which they see as a potential engine of growth that could replace the one that the real estate sector has provided for decades.

A shock effect has clearly been sought through the accumulation of disparate measures, but this is precisely the rule when it comes to recovery plans.

The central question remains: even if they are partly relevant, will these measures be effective? The Shanghai stock market has welcomed the measures, gaining almost 20% since the announcements were made, but that is not the real issue: the question is if the plan announced can help the Chinese economy to break out of the cycle of negative and self-fulfilling expectations in which it seems to have been mired for several years now, and at a time when it is very close to deflation (consumer prices are stagnating, but producer prices are falling sharply) and is suffering from a lack of confidence in its prospects by economic players.

Past lessons from Japan

The formal similarities between the package of measures announced and the ‘three arrows’ that formed the core of the ‘Abenomics’, and were supposed to pull Japan out of its economic stagnation, are striking. The Chinese authorities have just released the first two arrows, monetary and fiscal, and say they are preparing the third, that of structural reforms, including the much-needed and much-awaited reform of local government finances.

The shock suffered by property owners in China has been brutal, and the authorities' hesitant handling of the crisis has undermined their credibility. Confidence is an intangible asset that is lost much faster than it can be rebuilt.

Copyright Adek BERRY / AFP
People’s Bank of China, Beijing on July 9, 2024