Can China’s stimulus package reverse economic woes?

A recent article from Foreign Affairs analyzes China's economic stimulus measures rolled out in late September 2023, following months of disappointing growth post-pandemic. These measures include stock market support, monetary policy easing, and the recapitalization of state-owned banks.

Although the specifics of the fiscal stimulus will be disclosed after the US elections, the Vice Finance Minister has indicated that it will be substantial. However, the stimulus highlights Beijing's acknowledgement of the severe troubles facing the Chinese economy, undermining President Xi Jinping's ambitious “China Dream” of doubling the economy by 2035 and achieving widespread prosperity. The core issue plaguing the economy is weak domestic demand, driven largely by declining consumer confidence. Instead of fostering household spending, the government continues to prioritize state-directed investment, thereby maintaining the existing economic structure rather than addressing the underlying issues.

The article emphasizes that the crisis of confidence among ordinary Chinese citizens has drastically changed their economic outlook. In recent years, disposable income growth has stagnated, contributing to a pessimistic view of future prosperity. Despite recent stimulus efforts aimed at revitalizing consumer confidence, such as allowing mortgage refinancing and reducing down payment requirements for second homes, these measures have largely overlooked direct assistance to households. As a result, the government seems to prioritize restoring confidence among business elites over empowering ordinary citizens.

Additionally, the People’s Bank of China (PBOC) is adopting a quantitative easing approach similar to the Federal Reserve's, attempting to stimulate the economy through financial asset price support. However, the PBOC’s strategy does little to address the pressing need for increased consumer spending. Local governments face significant budget constraints, limiting their ability to provide the necessary fiscal support for households. Moreover, Xi's reluctance to implement direct cash transfers reflects a broader concern about fostering a welfare state, which could undermine his vision of a self-reliant China focused on global competitiveness.

In conclusion, while the recent stimulus package may provide temporary relief and stimulate short-term growth, it fails to tackle China’s deeper structural issues. As long as disposable income growth remains sluggish and consumer confidence low, the Chinese populace is likely to continue prioritizing savings over spending, perpetuating a cycle of economic uncertainty and discontent. Without bold, household-level financial support, the Chinese economy may struggle to rebound from its current challenges, leaving Xi Jinping's aspirations of achieving sustained growth and prosperity increasingly elusive.