Commentary: The clock is ticking for China economic stimulus measures to take hold
Domestic consumption is the key to boosting China’s economy, but the safe and slow approach means the clock is ticking for visible results, says economist Lee Kok How.
SINGAPORE: Course corrections for an economy as large as China’s are like steering the Titanic. Oversteer and it could capsize the vessel; understeer and the ship might still be on a collision course.
With growth in the third quarter this year the lowest since its COVID-19 reopening, recent fiscal and monetary policies have sparked debate about whether they will be the stimulus China needs.
Will gradual measures be enough? Recent measures include the 50-basis-point reduction in the amount of cash that banks must hold as reserves, which frees up 1 trillion yuan (US$140 billion) in bank liquidity, with hints of further cuts later this year. These aim to boost lending and spending, but the effects will take time to show.
The risk of oversteering or introducing too much stimulus is real, especially in light of China’s high debt levels.
Incremental stimulus is safer but slower - and so far, this has failed to address the crisis of confidence. The fizzling out of the initial market rally after the announcements indicates that investors are not convinced - time is running out for visible results.
REAL ESTATE, EXPORTS AND DEBT
Traditionally, China’s economic growth has been powered by three key engines: Real estate, investment and exports. However, these sectors are now facing significant headwinds.
While the real estate sector has somewhat stabilised from its sharp decline, it won’t provide much of a growth boost as it will take time to digest the overhang capacity.
Infrastructure investments while important, are being restrained to avoid further debt accumulation. Early this year, China’s State Council mandated a slowdown or halt of certain government-invested projects starting from 2024 in 12 key provincial-level regions to manage local government debt risks. This will weigh down on infrastructure-related industries such as construction, steelmaking and heavy machineries.
Prices of commodities such as cement and iron ore will also be adversely impacted. The impact will be felt globally as these outputs struggle to find new final demand destinations.
As a result, focus has now shifted towards strategic areas such as electric vehicles, renewable energy, semiconductor chips and equipment, and quantum computing. Exports are under pressure due to global trade tensions, especially with the European Union and United States, where large trade deficits with China are drawing significant pushback.
CONSUMPTION AND CORRUPTION
This leaves consumption as the key lever for growth, making the success of stimulus measures even more critical. To ignite consumption, the stock market wealth effect is certainly an area the Chinese authorities are considering.
A 2019 National Bureau of Economic Research paper underscores this, finding that for every dollar increase in stock market wealth, consumer spending rises by 2.8 cents in the United States. The study also correlates stock market wealth with increases in local employment and payrolls.
The government has pledged 100 billion yuan in equity market support and floated the idea of a stock market stabilisation fund. By boosting the stock market, the goal is to drive up consumer spending, a crucial component to kickstart domestic growth.
Other measures, such as consumption vouchers, are in the works. But effects are temporary and likely muted, given they tend to be one-off and merely bring forward future spending. Longer term solutions such as hukou reforms will take time to work through the economy.
China has also been stepping up its anti-corruption campaign in the banking and finance industry. Taken together with recent enhancements to the securities market focused on improving transparency and security among other things, these efforts aim to ensure that stimulus measures and wealth from future stock market rally more effectively reach businesses and households.
Liquidity injections and rate cuts must trickle down to have impact on consumption.
IS IT ENOUGH?
The clock is ticking for these measures to take hold. The full effect of policies could take months, even years.
In the meantime, useful indicators to watch will be retail sales, private sector corporate profits, as well as services sector growth and electricity usage. However, these are lagging indicators. Slightly forward-looking ones are consumer confidence and even the stock and bond markets.
China’s official monthly purchasing managers’ index (PMI) will be closely watched, as will the fourth quarter growth statistics awaited early next year.
For now, foreign investors remain sceptical. While these stimulus efforts are necessary, they may not be enough to address deeper structural issues in China’s economy.
Investments are still stuck in a rut. Exports will continue to face challenges from trade tensions, whether it is Kamala Harris or Donald Trump who prevails in the upcoming United States presidential election.
Any boost in domestic consumption will be welcome, but the uptick still has to be sufficiently significant to pull China out of this deflationary spiral. Household consumption makes up only 39 per cent of China’s GDP compared to 60 per cent in developed economies.
This might be the biggest hurdle for China to clear: Shifting to consumption-led growth requires more effort to boost the role consumption plays in the economy. Long-term measures include raising the household share of income, as well as improving social safety net through reforms to the hukou and social security system.
Like the Titanic, China’s economy must turn to avoid a crash. The next few months will be critical. If stimulus efforts don’t gain traction soon, China’s leadership will need to be ready for further corrective action before time runs out.
Lee Kok How is an Entrepreneur and Affiliate Faculty of Singapore Management University (SMU). He was formerly Principal Economist at BHP and Senior Economist at EDB and MTI. The views are those of the author and do not represent SMU and that of its affiliates.