Does fresh stimulus signify a turning point for China’s economy?

China’s recent economic stimulus package, launched in September 2024, has generated discussions about its potential impact on the country’s slowing economy. This set of measures, referred to as a “monetary easing cocktail,” includes a combination of interest rate cuts, reductions in mortgage costs, and liquidity injections designed to stabilize financial markets.

However, analysts from BCA Research express concerns that these actions may not be enough to spur a significant recovery, as underlying structural challenges remain mostly unaddressed.

The stimulus consists of five key components. Firstly, the People’s Bank of China (PBoC) reduced the Reserve Requirement Ratio for banks by 50 basis points to enhance liquidity within the financial system. Additionally, a 20-basis-point cut to the 7-day reverse repo rate is expected to lower borrowing costs, which may lead to slight reductions in the Loan Prime Rate and the Medium-term Lending Facility rate.

Moreover, mortgage rates were cut by 50 basis points, and down-payment requirements for second home purchases were lowered to encourage activity in the housing market. The PBoC also introduced an RMB 800 billion support package designed to provide liquidity for equity purchases by securities firms and listed companies, aiming to boost the stock market. Furthermore, additional financing was extended to state-owned enterprises to convert unsold residential properties into affordable rental housing, addressing pressures in the property sector.

Despite these initiatives, BCA Research remains skeptical about their efficacy in revitalizing the broader economy. For example, while the mortgage rate cuts may offer some relief, the annual savings of around RMB 150 billion would only translate to a 0.3% increase in personal consumption, too minor to significantly impact consumer spending. The labor market presents a considerable challenge as declining job prospects and stagnant wages impede any potential recovery in household consumption. Without stronger employment growth, any benefits from lower borrowing costs are expected to be limited.

Similarly, while the Reserve Requirement Ratio cut may boost bank liquidity, the main issue facing China’s economy is insufficient loan demand. With the prime lending rate around 5% and ongoing deflationary pressures, even minor reductions in borrowing costs are unlikely to spur new credit demand. Both households and businesses are cautious about taking on debt, particularly as falling property prices continue to undermine consumer confidence. The property market, historically a key growth driver for China, remains under strain, and downward pressure on prices is likely to continue.

Additionally, local governments find themselves constrained in their ability to stimulate growth due to a surge in anti-corruption investigations, causing local officials to exercise increased caution. This hesitance has restricted one of the traditional avenues for economic stimulation, as local government spending has historically played a crucial role during economic downturns.

BCA analysts argue that China’s current situation—a blend of debt deflation and what they term a “balance sheet recession”—necessitates far more substantial interventions than those currently announced. They contend that the economy would benefit from large-scale quantitative easing directed at the housing market and fiscal transfers to households, intended to increase confidence and spending power. However, the latest stimulus package appears piecemeal and unlikely to address these deeper issues. Without more extensive fiscal policies, a significant economic recovery appears improbable in the near future.

For investors, the outlook remains cautious. The stimulus may offer temporary support to the stock market, particularly for onshore Chinese equities, which BCA has upgraded to an overweight position within global and emerging market portfolios. Nonetheless, broader global market conditions could constrain growth, particularly in light of rising geopolitical risks and the possibility of a global trade slowdown. Therefore, while there may be opportunities in Chinese A-shares, BCA recommends maintaining a neutral stance on offshore Chinese stocks and advises against making substantial long positions in Chinese equities, especially if global markets enter a risk-averse phase.