China's economic turning point New Stimulus Signals a Break from Past Policies

The article from The Economist examines a significant shift in China's macroeconomic policies under Xi Jinping, highlighting recent stimulus measures aimed at addressing the country's economic challenges.

Traditionally, Xi has avoided consumer handouts and bold economic stimulus, believing that such measures could foster laziness and dependency. However, the article notes that China's ongoing economic struggles have compelled Xi to reconsider these stances. As the country approaches the 75th anniversary of the People’s Republic of China, he has initiated substantial stimulus measures that resemble those of past leaders during economic crises.

On September 24, the People's Bank of China (PBoC) announced a series of measures, including interest rate cuts, reduced reserve requirements for banks, and mortgage cost reductions. These actions are projected to save households significant amounts annually. The article emphasizes the introduction of innovative tools designed to boost the stock market, such as facilitating share buybacks and enhancing the balance sheets of financial institutions, which reflects a proactive approach to revitalize the economy.

The article discusses a notable shift in the ruling Communist Party's focus towards the economy, as evidenced by a special Politburo meeting devoted to economic issues. The party's language transitioned from a focus on "new momentum" to acknowledging "new situations and problems," indicating a recognition of the deteriorating economic environment. The Politburo's commitment to implementing countercyclical policies and stabilizing the property market further underscores this shift.

The government plans to issue an additional 2 trillion yuan in bonds, equivalent to approximately 1.5% of China's GDP. The allocation of these funds will address local government debts and stimulate household and firm spending. The introduction of a monthly handout for families, part of a broader effort to encourage population growth, illustrates a notable change in approach, moving away from previous skepticism towards direct financial assistance.

While the current measures are significant, the article notes that they fall short of the sweeping "4 trillion yuan" stimulus introduced in response to the 2008 financial crisis. This historical context is crucial in understanding the scale and impact of the new measures. The potential for these measures to merely offset local government fiscal tightening is also highlighted.

The article highlights a strong positive reaction from equity investors, with Chinese stock markets experiencing a notable rise of over 15% within the week. Notable investors, such as David Tepper, expressed optimism about the Chinese market, indicating that the stimulus measures have created a favorable environment for investment.

Overall, the article from The Economist illustrates a significant pivot in Xi Jinping's economic strategy in response to pressing challenges. The recent stimulus measures signify a departure from previous policies, reflecting an urgent need to stabilize the economy and reassure both domestic and international investors. The analysis underscores the importance of signaling in economic policy and suggests that, while these measures may not reach the scale of the 2008 stimulus, they serve as a powerful indicator of the government's intent to address economic difficulties and restore confidence in the market.