China’s stimulus package for this year, including recently announced measures aimed at revitalizing its slowing economy, is estimated to total approximately RMB 7.5 trillion (USD 1.07 trillion), which represents around 6% of the country’s GDP.
As I’m writing this, the finer details of the entire stimulus package have not been fully disclosed yet. But still, this stimulus package could potentially become China’s largest stimulus package in nominal terms if fully implemented. The recent package announced on September 24 unveiled the country’s boldest intervention to boost its economy since the pandemic.
In this article, we delve into some details regarding China’s recent stimulus, explore the immediate impacts on investors, and lay out the potential scenarios to prepare us to understand the uncertainties that lie ahead and make well-informed decisions.
Overview of China’s recent stimulus package
Below are some of the measures in the package that we know so far:
- Reduction in Reserve Requirement Ratio (RRR): Cut by 0.5 percentage points, injecting around RMB 1 trillion in liquidity. Further cuts of 0.23-0.5 percentage points may occur this year.
- Reduction in seven-day Reverse Repo Rate: Cut by 20 basis points to 1.5%.
- Loan Prime Rate (LPR) and deposit rate cuts: Lowered to encourage lending and ease credit conditions.
- Lower mortgage rates for existing homes: Reduced by 0.5 percentage points, saving homebuyers RMB 150 billion.
- Loan initiative for state-owned enterprises (SOEs): RMB 300 billion loan to enable SOEs to buy unsold homes and convert them into affordable housing.
- Lower down payment for second homes: Reduced to 15%, matching the rate for first-time homebuyers.
Strengthening capital markets:
- RMB 800 billion capital market support: Includes an RMB 500 billion facility to help institutions access funds to buy stocks and an RMB 300 billion re-lending facility to help accelerate sales of unsold housing.
- A RMB 500 billion joint policy package from seven government departments was introduced to stabilize China’s dairy industry, which has been affected by falling milk and beef prices since 2023.
Immediate economic impact and investor reactions
The initial market response was nothing short of euphoric. In the last week of September, the stock markets in Shanghai, Shenzhen, and Hong Kong saw their biggest weekly rise in 16 years. The CSI 300 Index of large-cap shares soared 16% in just a week, marking its most significant weekly gain since 2008. The Hang Seng China Enterprises Index embarked on its longest winning streak since 2018, climbing for 11 consecutive sessions.
However, the celebratory mood was short-lived. By early October, markets had reversed course as doubts crept in about the robustness of the government’s economic rescue plans, and the further stimulus measures were also met with disappointment. China’s National Development and Reform Commission advanced RMB 100 billion in spending from the 2025 budget. However, this move failed to maintain market confidence. On October 9, CSI 300 Index declined 7.1%, its biggest one-day fall since 2020 [8].
Is it sustainable?
While Goldman Sachs has optimistically revised its 2024 GDP forecast for China from 4.7% to 4.9%, closer to the official target of 5%, scepticism remains about the sustainability of this growth trajectory. The World Bank projects a slowdown to 4.3% by 2025, highlighting the persistent structural challenges facing the Chinese economy.
China’s CPI growth has remained around zero since March of last year, while the Producer Price Index (PPI), which measures the cost of goods at the factory gate, declined by 2.8% in September, which has been falling for the 24th consecutive month (-1.8% in August). Besides, talking more on something more structural, China’s rapidly ageing population and declining birth rates pose significant challenges to future economic growth as well. The working-age population is shrinking, potentially leading to labour shortages and increased social welfare costs.
Moreover, China’s local government debt has been a growing issue since 2021. The debt-to-GDP has climbed by almost 30% to 310% of GDP in the second quarter of 2024, which would burden economic growth and pose long-term risks to financial stability, according to Morgan Stanley. China’s economy has long been experiencing a crisis of confidence, partly driven by a lack of transparency in key data, which may undermine effective decision-making and slow the country’s economic transition. However, officials are still striving for stability and growth.
Hypothetical scenarios post-stimulus
Now, let’s get back to the stimulus package itself; what would happen if the stimulus package is successfully implemented from three different perspectives:
1. Soft landing and stabilized growth: In this scenario, the stimulus measures succeed in stimulating growth and stabilizing key sectors, particularly real estate (accounted for 23.6% of GDP) and consumption. By managing debt levels effectively and encouraging domestic consumption, China avoids a recession, leading to a smooth economic transition that benefits both local and foreign investors. The stimulus measures provide enough support to achieve growth targets for 2024 (5% growth).
2. Hard landing and economic stagnation: The stimulus leads to unsustainable debt accumulation, eventually triggering financial distress and economic stagnation. A bursting property bubble or a crisis within the local government financing sector could lead to a rapid economic downturn, affecting global markets. This could lead to asset price corrections, making foreign investors wary of exposure to China’s economy and resulting in significant capital outflows. A sharper economic downturn could ensue if stimulus measures prove insufficient to address deep-seated issues or if geopolitical tensions escalate.
3. No landing (limited impact): The stimulus fails to generate significant growth momentum in the no landing scenario. Economic growth remains flat as structural issues such as high debt, demographic challenges, and weak consumer sentiment prevent the stimulus from having its intended effect. The economy continues to stagnate, and while no major crash occurs, growth remains lukewarm, leaving investors without the hoped-for opportunities.
All three scenarios above are hypothetical, and scenarios other than these could also unfold, but the soft landing is definitely the intended and ideal situation.
The fifth perspective
In short, investors should be cautious but also opportunistic. The Shanghai Stock Exchange’s price-to-earnings (P/E) ratio is currently at its lowest level since late 2014, which raises an important question: Is this a contrarian opportunity or a value trap?
While the stimulus package undoubtedly presents opportunities for those willing to navigate the volatile Chinese markets, it is crucial to remain mindful of the significant risks the country faces. Ultimately, only time will reveal how these dynamics will unfold.
