China late last month announced a series of stimulus measures to revive economic growth, but concerns still linger about the world’s second-largest economy, such as how quickly the new measures would start making a difference and whether their effects would be sustained over the long term. The worries represent the first major test of investor confidence in Beijing’s latest economic agenda.
Before the start of China’s national holiday last week, top leaders at the People’s Bank of China, the National Development and Reform Commission, the State Council and the Central Politburo of the Chinese Communist Party (CCP) discussed several policy measures to rescue the struggling property sector. The measures include a 50 basis-point reduction in banks’ reserve requirement ratio, a 30 basis-point cut of the interest rate charged on its one-year policy loans, a 50 basis-point drop in mortgage rates on average and a 10 percent reduction in minimum down payments for people buying a second home.
The measures come as China’s economy slows and investor confidence continues to decrease, following a slew of negative data that raised alarms about falling consumer prices and domestic demand in the country. At the unscheduled politburo meeting on Sept. 26, Chinese President Xi Jinping (習近平) and other top CCP leaders vowed forceful measures to stabilize key sectors and restore growth momentum. Unlike its typical April, July and December sessions, last month’s meeting highlighted the urgency of the situation and underscored a notable shift in policymakers’ tone and policy substance to tackle the slowdown.
The stimulus measures buoyed investor confidence last week, as evidenced by market rallies in Shanghai, Shenzhen and Hong Kong. The launch of the stimulus measures also indicates that the Chinese government is clearly aware of the difficulties in reaching its GDP growth target of 5 percent this year, but its package of policies only addresses the symptoms of the country’s economic woes, not the cause.
First, many Chinese industries face overcapacity problems that cannot be solved in the short term.
Second, the Chinese economy is experiencing a balance sheet downtrend with debt piling up enormously in public and private sectors, after Beijing encouraged local governments, developers and enterprises to increase leverage for investment and construction, while most people borrowed too much to purchase property.
Third, insufficient demand and bearish consumer confidence need time to adjust, because people would not rush to buy property just because new measures are announced.
On the bright side, China’s measures are poised to stimulate the economy, although the speed of recovery would likely be slow. Still, it is unlikely that the economic downtrend would be reversed by simply stimulating domestic demand. Beijing’s monetary stimulus measures are unlikely to be effective without the support of fiscal stimulus at the same time.
More importantly, it is not that Chinese lack the money to buy property or the market lacks the liquidity for loans, but rather weak loan demand is prevailing in the private sector, which could limit the effects of the latest monetary easing policies.
The sharp stock rallies in China and Hong Kong would eventually lose momentum if investors continue to trade more on market sentiment than on the economic fundamentals. Many still remember the situation in early 2015, when Chinese authorities introduced several market-friendly measures that triggered bull runs.
However, the bubble burst in the middle of the year after investors realized that stock rallies did not mean the economic fundamentals were improving
This time, Chinese stocks could fluctuate before the economy shows it has a more solid footing. Investors should maintain a high degree of vigilance.
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