WEEKLY E-MAIL

8 October 2024

CHINA’S STIMULUS MEASURES TO BOOST TROUBLED ECONOMY

By Amelia Paullo

Last week, the Chinese government announced several stimulus measures in a determined attempt to reach their annual 5% growth target, which the country has struggled to reach since the pandemic began.

The stimulus measures announced by China’s Central Bank last week are the most comprehensive stimulus policy actions undertaken in recent years in terms of scale and urgency, and are likely to provide meaningful economic growth and stock market support.

The measures are a combination of monetary and fiscal support that will include funding from ultra-long term and special sovereign bonds.

Although the direction of such fiscal spending is yet to be detailed, the strongest indication is that it is to be spent on initiatives to drive consumption, along with a capital injection into the banking system of around 1 trillion Renminbi (RMB), equivalent to 142 billion USD.

Some of the key stimulus policy measures are:

• A 30-basis point cut in the 1-year medium-term lending facility rate (from 2.60% to 2.30%).
• Reserve requirement ratio cut by 50bps, which frees up ~$142bn USD of liquidity.
• Lower mortgage rates for existing loans.
• Down payment ratio for second homes cut to 15% from 25%.
• Financial institutions will be able to borrow for stock investments – 500 billion RMB facility.
• People’s Bank of China (PBOC) providing subsidised funds to be used for share buybacks and purchases by controlling shareholders – 300 billion RMB facility.
• Funding for such initiatives can grow if there is evidence they are working.
• Rare one-off cash handouts and subsidies to those in the lowest income bracket.
• Pledge to improve the employability of college graduates, migrant workers and low-income families.

Key areas in which these measures will likely have meaningful impacts

The property and consumer sectors could benefit from a reduction in mortgage rates and down payment ratios could increase housing market activity, stabilise pricing and general consumption.

In terms of the financial markets, measures aimed at providing stock market support could help stabilise market prices and attract investors. Also, by increasing liquidity into the system, the PBOC aims to encourage further lending and flows into growth assets.

While the Chinese economy is not yet out of the woods, the range of outcomes are converging towards larger stimulus and a return to growth or at least addressing the issue of deflation in the next year.

What’s different about these measures (compared to previous ones) is that they have become more directed at addressing the demand side of the economy – namely consumer spending, which is the largest component of GDP growth.

Given the indebted property market has weighed down this component through the wealth effect channel, addressing this will likely remain a key priority for the Chinese government moving forward.

Whilst further details are yet to be announced, the proposed measures appear promising and look likely to provide a short-medium term boost to Chinese GDP growth.

Amelia Paullo
Financial Planner
SMSF Specialist Advisor™
Authorised Representative No. 1243426

If you have any questions or comments, please email me at amelia@gfmwealth.com.au

Disclaimer: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution.  The information here is of a generic nature, and does not take into account your investment objectives or financial needs.  No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.

Copyright: © This publication is copyright. Subject to the conditions prescribed under the Copyright Act, no part of it may, in any form, or by any means (electronic, mechanical, microcopying, photocopying, recording or otherwise) be reproduced or transmitted without permission. Enquiries should be addressed to GFM Wealth Advisory.