China’s leaders seem to have invoked the definition of insanity, attributed, perhaps wrongly, to Einstein: doing the same thing over and over again, and expecting different results.
For the fourth time in 16 years, Beijing has been spooked by faltering growth into adopting an array of economic stimulus measures designed to reset the economy. It didn’t work for long in 2008, 2015 or 2021, and the “bazooka” measures announced recently will also most likely come up short.
These programmes have failed in the past because the government’s focus is mainly on the cyclical – or short-term – outlook. It thinks quick palliatives are the answer to systemic problems such as high youth unemployment, the real estate bust, weak productivity and deflation. China’s problems, however, require structural – or root and branch – economic reforms, which necessitate political changes that are anathema to its Leninist government.
The government has certainly managed to set the stock market alight, and it hopes that renewed confidence will spill over into consumer spending. After a relentless decline of about 40% since early 2021, the late September package of stock market support, monetary easing and housing measures triggered a roughly 30% rise in equity values in the week before the recent Golden Week holiday.
The centrepiece was 800bn yuan (£86bn) worth of financing facilities allowing listed firms to buy back their own shares, and non-bank financial firms to buy equities. The authorities lowered interest rates on market instruments and mortgages, banks’ reserve requirements, and the minimum downpayment on second homes. They increased the subsidy to state enterprises to buy unfinished homes, which loom heavily over the real estate market. The stock of unsold homes, disproportionately situated in smaller towns and cities, is estimated to amount to about three to four years of sales at current rates.
Stock market sentiment has cooled since. While direct equity market intervention and easier monetary conditions bring relief, they do little to address deep-seated economic flaws. Most of the measures announced were either extensions or variants of pre-existing policies that haven’t had great traction. China is in a so-called liquidity trap, where cutting interest rates is not really effective. It is quite likely that stock market gains will dissipate unless the authorities act to improve the sustainability of the economic growth, and company earnings.
Confidence is important, but the bulk of household wealth resides not in stocks but in the beleaguered property market where prices are falling, and in low-yielding bank deposits. Therefore, confidence to spend requires a more stable property market, stronger income growth and a more robust jobs market.
There were expectations over the weekend that a hastily convened finance ministry press conference would address the issue. In the event, there were no significant measures, and no details or numbers about how budgetary policy would be used to bolster the economy over the coming year.
The finance minister said government borrowing would rise for the rest of this year and that local governments, responsible for public goods and services, would be encouraged to use about 2.3tn yuan of borrowed but unspent funds. They would also be allowed to borrow to buy unused land and unsold properties, while Beijing would authorise debt swaps with local governments and fund new capital injections into large state banks.
These measures could help China to get closer to its 5% GDP target for this year. However, there could be additional fiscal easing in coming months, especially if the economy remains lacklustre as winter approaches, as seems likely.
Overall, though, the government still seems focused on financial engineering within the state sector, rather than fundamental reform. The economy may benefit from as yet unspecified measures in 2025, but it is still going to slow down under the influence of misallocation of capital, limited debt capacity, long-term decline in the property sector, and weakness in household income and spending.
There is little question that Xi Jinping is prepared to tweak the government’s overall policy stance, but his reform agenda is quite different from the one that economists favour, both in China and the west.
A solution would involve the sustainable expansion of the income and consumer demand shares of the economy, an end to deflation risk, more income redistribution, the promotion of private enterprise, and extensive tax and local government reforms.
Xi’s more Leninist agenda emphasises supply and production, and what he calls “high-quality development”, which is essentially about state- and party-led industrial policies to allocate capital to lead and dominate modern science, technology and innovation in the global system.
There is no doubt that China already has and wants to expand advanced industrial expertise and leadership in some key firms and sectors. Yet these islands of technological dominance exist in a sea of macroeconomic imbalances and troubles, which can only really be addressed by more liberal and open economic reforms.
The current focus on economic policy is important not for some decimal points on GDP but as a signal as to whether the government can, or wants to, grasp the nettle.
• George Magnus is a research associate at Oxford University’s China Centre and at Soas. He is the author of Red Flags: Why Xi’s China is in Jeopardy.
