China unveils bold economic measures to revitalise struggling economy

As China grapples with economic challenges, Forbes highlights that Beijing is once again attempting to revitalize its struggling economy.

Beijing is once again taking steps to revive China's struggling economy. Acknowledging the shortcomings of its May stimulus package, the Chinese leadership made a significant move in September by implementing monetary and fiscal measures that surpass previous efforts.

While these actions may help Beijing achieve its 5 per cent real growth target for 2024, they are unlikely to reignite the nation's economic momentum. The fiscal measures reflect a peculiar blend of initiatives. According to China’s Xinhua News Service, the government plans to issue approximately 2 trillion yuan (around $284.4 billion) in additional sovereign debt. 

Half of this amount will assist already burdened local governments, while the other half will fund various support programs for individuals and families. Part of the assistance for citizens will include what Beijing terms "living allowances" for the impoverished, likely introduced to commemorate the 75th anniversary of communist rule. Recipients are expected to quickly spend this money, providing a temporary boost to consumer spending. However, this measure is unlikely to have a lasting impact. Additionally, Beijing plans to offer a monthly allowance of 800 yuan ($114) for each child in families with two or more children. While this could have a more enduring effect on economic activity, such families are relatively few in China today. 

This initiative may also aim to encourage higher birth rates to alleviate the demographic challenges posed by years of low fertility, though any significant increase in workforce numbers will take 15 to 20 years to materialize. The city of Shanghai will contribute 500 million yuan in vouchers for residents to use on dining and entertainment. However, given that this accounts for less than 1.0 per cent of Shanghai’s GDP, its overall impact is likely to be minimal. Furthermore, Beijing has allocated 1.0 trillion yuan (approximately $142 billion) to recapitalize six major banks, indicating an effort to address some of the damage caused by the ongoing property crisis. On the monetary front, the People’s Bank of China (PBOC) plans to reduce the one-year medium-term lending facility rate from 2.3 per cent to 2.0 per cent. 

Additionally, the seven-day reverse repurchase rate, its primary policy tool, will decrease from 1.7 per cent to 1.5 per cent. While these adjustments may seem minor compared to the recent half-point rate cuts by the Federal Reserve in the United States, they are significant by PBOC standards. To further promote lending and stimulate economic activity, the PBOC will lower the reserve requirements for banks against their deposits and loans. 

To boost China’s declining stock market, the bank will allocate 500 billion yuan (approximately $70 billion) for lending to investment funds, brokers, and insurance companies, along with an additional 300 billion yuan to support share buybacks by publicly listed firms. The aim is to use a rising stock market to help restore some of the household wealth lost during the property crisis, which has negatively impacted real estate values. 

Furthermore, the PBOC will reduce mortgage rates for existing homeowners, providing relief since, unlike in the US, Chinese homeowners lack refinancing options. To encourage home purchases, the required down payment on second homes will also be lowered from 25 per cent to 15 per cent. Despite the impressive array of fiscal and monetary measures, they are unlikely to effectively address the underlying issues. 

By Naila Huseynova