Can China’s economy recover?

Once accustomed to economic growth of more than 7% for a long time, and accounting for 15% of global trade in 2020, China has suffered from an unprecedented real estate and trust crisis after the severe quarantine of the Xinguancun epidemic, which has severely affected consumption.

In its latest global forecast, the OECD noted that China’s economic growth is constrained by “weak consumer demand and the deep adjustment that is taking place in the real estate sector”.

Recently, however, China’s stock market leapt up like a scared rabbit, setting a number of new historical records: the trillion-dollar opening bell broke in 35 minutes, the fastest trillion-dollar trading turnover in history; the turnover in Shanghai and Shenzhen exceeded 2.59 trillion in a single day, a new record; and the Shenzhen Composite Index (SZCI) rose by 10.67% in a single day, with a five-day cumulative increase of 30.26%, a new record.

At the same time, the property market stimulus policies have also been introduced one after another, September 29, the Ministry of Housing and Construction meeting, said that the support of first-tier cities to use the autonomy of the real estate market regulation. Shanghai, Guangzhou, Shenzhen, three first-tier cities to follow overnight, so that the nationwide mortgage interest rates and down payment ratios have been down to the lowest level in history. The property market, the stock market, the general public on the macro-economic most direct sense of most from this. In the week before the National Day, the two markets were suddenly injected with policy bonuses that exceeded expectations.

Immediately, the whole world was asking, “What’s going on in China? In Western societies, any major economic policy is discussed for a short period of time, so that the market can prepare for it, and those who see it early will respond to it. In socialist countries like China, many of which practise a planned economy, there are traces of such policies, but the changes in China’s economy this time around have come out of nowhere, fully reflecting the government’s use of its own power of governance to make immediate changes to the economy. It can be said that such a drastic change has never happened before in China’s modern history.

However, some scholars believe that it is impossible to say for sure whether the changes in the stock market reflect a real change in the direction of the economy within a short period of time. The response of the stock market reflects the immediate decision of people’s mind, while the change of the economy is determined by whether the whole society, or even the whole world, can find a new direction from the change of policy to promote the life of the citizens. The fact that China’s stock market lagged behind other countries is mainly a reflection of China’s economic predicament. Whether the problem has been solved or not is precisely what we need to think about.

Will China’s massive economic stimulus package work?
We can look at this from a number of perspectives. It is the combined result of a series of measures taken by the government in the current complex domestic and international economic environment.

1. Monetary policy easing and liquidity support

The Central Bank of China (PBOC) has been gradually adopting monetary easing policies since the second half of 2023 to support the economic recovery and cope with the downward pressure on the global economy.

By lowering the deposit reserve ratio (RRR), commercial banks have been able to release more funds for lending and investment, increasing liquidity and making credit more readily available to businesses and individuals; and lowering the cost of financing by maintaining a lower level of the benchmark interest rate, which typically stimulates borrowing and investment.

This effectively sends a signal to the market that the government is supporting the economy, which not only boosts investor confidence, but also provides upward momentum for the capital market.

2. Fine-tuning and targeted support for the real estate market

Real estate is an important pillar industry of China’s economy, accounting for a significant portion of GDP. In recent years, the government has implemented stringent regulatory policies to prevent a real estate bubble and curb the rapid rise in housing prices, which has led to a cooling of the real estate market and even triggered capital constraints and risks in some industries.

Recently, in some non-Tier 1 cities, the government has appropriately relaxed the restrictions on home purchases and lowered the downpayment ratios, emphasizing the protection of housing demand, especially for those who just need to buy a home, which is in line with the regulatory objective of balancing supply and demand. The rebound in the real estate sector had a significant impact on the overall economy, especially on related industries such as steel, cement and building materials, which in turn boosted the market’s optimistic expectations for the economy.

3. 11th Golden Week and Consumption Drive

The 11th Golden Week is one of the most important consumer seasons of the year, covering a wide range of areas such as tourism, retail, food and beverage, and entertainment. In order to boost domestic demand, the government launched a series of policies to promote consumption before and after the holiday, such as travel incentives and holiday vouchers, which to a certain extent stimulated the activity of consumption-related industries.

4. Capital Market Reform and Attracting Foreign Investment

In recent years, the Chinese government has accelerated capital market reforms, especially in attracting foreign capital and opening up the market. The capital market reforms have not only boosted market confidence, but also provided the basis for long-term growth, driving the stock market upward.

5. External environment and global economic impact

Currently, the global economy is slowing down and central banks in many countries have adopted accommodative monetary policies, resulting in relatively abundant international capital liquidity. As China’s economy has been relatively stable and policy support is in place, some of the global capital has flowed into the Chinese market, which has driven the stock market up. Meanwhile, improved international economic cooperation (e.g. trade relations with Europe and ASEAN) also provided additional support to the Chinese economy.

Conclusion
This round of “combined fist” policies for China’s economy demonstrates a multi-faceted effort that includes monetary easing, real estate fine-tuning, and consumption promotion, as well as capital market reforms and a long-term mechanism for attracting foreign investment. Together, these measures have boosted market confidence and led to a rebound and upturn in the stock market. Despite the positive performance in the short term, the government still needs to address deep-seated challenges in the long term, including structural risks in the real estate sector and the upgrading of consumption. Future economic performance will depend on the sustainability of these policies and changes in the global economic environment.

What is the impact on the world?
The series of financial and fiscal policies will stabilize the real estate market in China, at least in the short term, and the real estate market actually has a very strong relationship with steel and the iron ore and coke used to make steel, so this is a transmission mechanism.

The demand for iron ore and coke exported from Australia will increase, which is the main reason why the Australian dollar has been on an uptrend against other currencies in the past two days.

In addition, China’s announced stimulus package has supported international luxury, metals and industrial companies. These industries, which are most dependent on China, are benefiting from the hope that Chinese consumption may pick up.

Will further measures be needed to stabilize economic growth in the future?
So far, this “combination” of Chinese policies has already had some initial positive effects, particularly in boosting market confidence, promoting a rebound in the stock market and supporting consumption. These measures have helped ease short-term economic pressures, especially in the run-up to the 11th Golden Week, and have succeeded in stimulating activity in some sectors, such as tourism, consumption and real estate. However, more structural adjustments and further policy support may still be needed to achieve long-term economic stability and sustainable growth.

It remains to be seen whether this short-term rebound in consumption will translate into a long-term trend, as the effects of existing policies suggest. The real estate and tourism sectors, in particular, are facing long-term structural challenges.

In order to maintain stable and sustainable economic growth in the long run, the following policy areas are likely to be the focus for the future:

1. Further structural reforms: China’s economic growth model is under pressure to transform, and the traditional growth model of relying on real estate and investment is difficult to sustain. In the future, the government may need to promote deeper structural reforms, particularly in the areas of high-tech, manufacturing upgrading and green economy, to facilitate economic transformation and reduce the reliance on real estate and infrastructure investment.
2. SME support and innovation promotion: SMEs play an important role in the economy, and their ability and flexibility to innovate is crucial to the sustained growth of the economy. Further lowering the financing costs of SMEs, providing tax incentives, and supporting entrepreneurship and innovation will help unleash the economy’s internal growth momentum and promote the development of emerging industries.
3. Expanding Domestic Demand and Enhancing Consumption Power: Despite the rebound in spending during the Golden Week, in the long run, the Government needs to continue to promote income distribution reform and improvement of the social security system to enhance the consumption power of the population. By enhancing the spending power of the middle and low-income groups, the role of domestic demand in supporting the economy can be strengthened, and the reliance on exports and investment can be reduced.
4. Mechanism for long-term healthy development of the real estate sector: Despite the short-term easing of real estate regulation to stabilize the market, how to achieve a stable and healthy development of the real estate market in the long term remains an important issue. In the future, the government may need to introduce more structural policies in the areas of supply/demand balance, land supply and rental market development, so as to avoid over-reliance on real estate as the engine of economic growth.
5. Risk management in light of global economic fluctuations: The global economic environment is still full of uncertainties, especially with the gradual withdrawal of interest rate hikes by the Federal Reserve Board and other major central banks, the global capital flows and trade environment may change. China needs to maintain flexibility in its external economic policies, continue to promote multilateral trade and regional economic cooperation, and at the same time strengthen its risk management in foreign exchange and financial markets.

Conclusion
Overall, the existing “combined fist” policies have injected vitality into the Chinese economy in the short term, boosted confidence in the consumer and capital markets, and promoted the recovery of local industries. However, the future economic growth still faces many challenges, including the pressure of structural adjustment, uncertainties in the global economic environment and insufficient domestic demand. To ensure long-term economic stability and sustainable development, the government needs to continue to implement more targeted structural reforms and policy adjustments to ensure that the economy can maintain its dynamism and innovation-driven growth under the new normal state.

China’s economic stimulus has been extremely helpful to Australia, with the recent return of Chinese tourists being one of them. However, the global environment that China faces today, and in particular the tightening of the U.S., makes it uncertain whether China will be able to implement its long-term stimulus policies, despite Beijing’s very definite preference for long-term stimulus of the Chinese economy. The U.S. is also facing its own internal and external dilemmas, with its own internal economic malaise and the constraints on the U.S. in the Middle East and Israel, including the Russian-Ukrainian war, which has in fact left time for China to stimulate its own economy.

Will China’s economy recover? It will take a long time for the answer to be announced. There is no doubt about the attitude of the Chinese government, and the strategy has seen short-term results, but it is the global factors that are troubling us, and how to open up a way out of the current state of the world’s economy that is the real difficulty.