China Faces Growing Calls for Stimulus as Economy Stumbles
China’s economy, the world’s second largest, is facing growing pressure from a real estate slump and tepid consumer confidence, leading to calls for increased stimulus measures. While the Chinese government has introduced incremental policies to support the property sector and boost consumption, economists both inside and outside the country believe more drastic action is needed to achieve the country’s growth targets.
Key Takeaways:
- Economists are urging China to implement a more significant stimulus package, with some calling for at least 10 trillion yuan ($1.42 trillion) in ultra-long government bonds to be issued for investment in human capital.
- China’s property market remains a major drag on the economy, with investment falling over 10% in the first eight months of the year. Economists suggest policymakers need to provide direct funding to stabilize the sector.
- Local governments are facing tight fiscal conditions, limiting their ability to support infrastructure investment.
- China’s Third Plenum meeting in July largely reiterated existing policies, while signaling an intention to escalate policy stimulus incrementally.
- Exports have been a bright spot for the Chinese economy, surging by more than 8% in August.
The Drag of the Real Estate Sector
China’s real estate sector, once a major driver of economic growth, has been struggling for years. The ongoing property slump is characterized by falling prices, stalled projects, and declining investment. This is largely attributed to a combination of factors including high debt levels, government regulations, and a slowing economy.
Economists are particularly concerned about the risk of unfinished projects, with millions of pre-sold units yet to be delivered. This has eroded consumer confidence in the market and deterred buyers from making new purchases.
Liu Shijin, former deputy head of the Development Research Center at the State Council, has argued that the property crisis is the "elephant in the room" and requires a significant intervention. He suggests a bailout package worth 3 trillion yuan to restore confidence and stabilize the market.
The Limits of Existing Policy
The Chinese government has made efforts to support the property sector, including measures like easing mortgage rates and relaxing purchase restrictions. However, these measures have had limited impact due to the severity of the crisis.
Similarly, government attempts to boost consumption, such as subsidies for trade-ins, have yet to show meaningful results. Retail sales growth remains sluggish, indicating that consumers are hesitant to spend.
Local governments, facing tight fiscal conditions, are also constrained in their ability to support infrastructure investment. This has contributed to a slowdown in investment growth despite increased government bond financing.
The Urgent Need for Stimulus
Experts argue that the combination of a weak property market, tepid consumer spending, and constrained local government budgets is creating a "second wave of shocks" for the Chinese economy.
While some economists suggest further monetary policy easing, others believe that fiscal policy and structural reforms are necessary to address the underlying challenges. This includes direct intervention to stabilize the property market, increased funding for local governments, and investment in human capital to boost long-term growth.
Looking Ahead
China’s economic outlook remains uncertain. While the government is committed to achieving its target of around 5% GDP growth for 2024, achieving this goal will require decisive action to address the challenges facing the economy.
The upcoming months will be crucial for observing the government’s response to the economic slowdown and its commitment to implementing necessary stimulus measures.
While the immediate focus may be on achieving short-term growth targets, China’s long-term economic success will depend on a more holistic approach that addresses the underlying issues in its property sector and promotes more balanced and sustainable growth.
