Sino Stimulus Splurge: China’s Unprecedented Response to Economic Slowdown
Shenzhen Stock Exchange (Photo: International Banker)
On Tuesday, Sept. 24, Chinese government officials and the People’s Bank of China (PBC) announced a new fiscal stimulus package aimed at uplifting the decelerating Chinese economy and restoring faith in the nation’s domestic stock markets. The PBC intends to cut its short-term seven-day reverse repo rate from 1.7 to 1.5 percent, as well as reduce reserve requirement ratios. Additionally, there will be a ¥500 billion fund to help brokers and insurance companies buy stocks and ¥300 billion for corporate stock buybacks. In conjunction, these measures should supply additional liquidity to the market and stimulate consumption and consumer confidence.
Other smaller actions taken by the PBC are a one-year Medium-Term Lending Facility (MLF) rate cut by 30 basis points (bps), lower mortgage rates for existing loans, a down payment ratio cut for second homes, and loan prime rate and deposit rate cuts.
The measures, and their respective scales, have truly illuminated international investors to the severity of the Chinese financial slump. According to representatives from Goldman Sachs, it is a “rar[ity] [to see] simultaneous cut of policy rates and RRR, … [the] magnitude of [the] cuts and the unusual guidance on further policy easing indicated policymakers’ growing concerns over growth headwinds.” Others have noted the significance of the CCP’s 5 percent annual GDP growth target for the year, a target which the Chinese economy looked unlikely to reach prior to the stimulus reveal. China has long provided the global economy with gargantuan double-digit annual GDP growth rates, propelling the nation into the world’s second largest economy in nominal ($) terms and world’s largest economy in purchasing power parity (PPP) terms.
However, the last time China surpassed 10% annual growth was in 2010, falling to just 6% before the pandemic. Currently, the Chinese GDP growth rate for 2023 stands at 5.2%, a rate which compared to developed nations like the US (2.5% in 2023) is quite large, but compared to other developing countries is rather small. For a country like the US, with a GDP per capita of nearly $76,500 and high average incomes, 2-3% GDP growth is a relative success. However, for a nation like China – which only has a GDP per capita of $12,720 – high single-digit or even double-digit GDP growth is essential to achieving developed nation status and avoiding the dreaded middle-income trap. Developing nations such as China typically boast much higher GDP growth rates than developed nations due to the Catch-Up Effect, among other factors.
Two men watch the changing stock tickers on the floor of the Shanghai Stock Exchange: (Photo: SCMP/Reuters)
While it’s too early to properly gauge much yet, the initial market reaction to the stimulus has been mixed. On Tuesday, the Hang Seng Index rose 3.2% and the blue-chip CSI 300 Index rose 2.4%. However, on Wednesday, market expectations tapered as the Hang Seng growth slowed to a mere 0.68% and the Shanghai Index grew a mere 1.16%. The Shanghai Index is up nearly 6.5% on the week, however is still down 2.23% YTD. On a positive note for China, two days have likely not given the markets adequate time to react fully. With additional cuts and actions expected by the People’s Bank of China, the world holds its breath awaiting to see if China reaches its 5% growth ambition.