China's Economic Stimulus: A Path to Recovery or False Hope?

In late September and early October 2024, the Chinese government announced a series of targeted policy measures aimed at boosting the ailing economy and restoring investor confidence. The multi-pronged approach, which included rate and ratio cuts, fiscal stimulus, and liquidity injections, has sparked debate among economists and investors about the effectiveness of these measures in reviving the Chinese economy. This article explores the impact of these policies on overall economic activity and market sentiment, as well as the sectors and industries that have shown the most significant responses.



Rate and Ratio Cuts, Fiscal Stimulus, and Liquidity Injections

The People's Bank of China (PBOC) implemented a basket of rate and ratio cuts, including a 0.2 percentage point reduction in the policy rate (7-day reverse repo) and a 0.5 percentage point cut in the reserve required ratio (RRR). These moves aimed to lower borrowing costs for businesses and individuals, encouraging them to engage in economic activities (Source: Kai-Kong Chay, Senior Portfolio Manager, Greater China Equities). Additionally, the PBOC cut the existing mortgage rate by 0.5 percentage points, allowing existing mortgage payers to refinance their loans at a lower rate and releasing around RMB 150 billion in interest savings back into the economy.

The National Development and Reform Commission (NDRC) announced incremental policies to step up fiscal measures, including speeding up special purpose bond issuance to local governments, encouraging private capital to participate in major infrastructure projects, and supporting private capital to issue infrastructure REITs. The NDRC also stated that it would front-load RMB100 billion (US$14.1 billion) from the 2025 central budget to support key urban renewal projects, aiming to achieve an economic growth target of about 5% for the year.

The PBOC planned to set up an RMB 500 billion asset swap facility for non-bank financial institutions to borrow directly from the PBOC with their quality collateral, facilitating access to funding for these institutions. Additionally, the PBOC announced an RMB 300 billion re-lending program for corporate buybacks, which could help extend the pace of stock repurchases and boost market sentiment.



Significant Responses in Specific Sectors and Industries

The targeted policy announcements have had a positive impact on market sentiment, with the China equity market rallying sharply in the final week of September and early October 2024. The multi-pronged approach, empowering individuals, corporates, banks, and non-bank financial institutions, has boosted investor confidence in China's economy (Source: Kai-Kong Chay, Senior Portfolio Manager, Greater China Equities).

The consumer goods trade-in initiative, supported by 150 billion yuan in funding, has led to a rise in expenditure on home appliances and automobiles. Home appliance sales increased by 22.2% and car sales by 6.6% in November 2024 (NBS). E-commerce logistics hit a five-year high in business volume in October 2024, and spending on consumer services gained fresh momentum, particularly in the hospitality and dining sectors.

Investments in high-tech manufacturing and services have surged, with the value-added output of high-tech manufacturing industries growing by 9.4% year-on-year in October 2024. Sub-sectors like intelligent drones, electric vehicles, and solar cells saw growth of 41.9%, 48.6%, and 13.2%, respectively (NBS). Investments in high-tech industries increased by 9.3% over the first ten months of 2024, outpacing overall investment growth.

Clear signs of recovery have emerged in the real estate market, bolstered by well-targeted policies that have strengthened confidence and rekindled demand. The minimum down-payment ratio for second homes was reduced from 25% to 15%, making it easier for buyers to purchase additional properties and stimulating the real estate market.

Conclusion

The targeted rate and ratio cuts, fiscal stimulus, and liquidity injections announced in late September and early October 2024 have had a significant impact on overall economic activity and market sentiment in China. The consumer goods, high-tech manufacturing and services, and real estate sectors have shown the most significant responses to these measures, aligning with the government's strategic goals of stimulating domestic demand and consumption, promoting high-quality development, and stabilizing the real estate market. However, the long-term effectiveness of these policies remains to be seen, and investors should monitor the progress of these sectors and the overall economy to assess the true impact of the stimulus measures.