With a slew of tax breaks and hints of more loans to small businesses, Chinese government planners began this week to address what many consumers and investors are already feeling: the troubles of the world’s second-largest economy.
After months of disappointing data, economists and traders expect the government to cut its headline policy rate for the first time in almost a year on Thursday.
The move was heralded by a series of easing measures aimed at boosting liquidity in the financial sector. Policymakers cut overnight bank lending rates on Tuesday, while big banks cut deposit rates on Saturday.
But many economists argue that stronger action is needed to revive an economy weighed down by a persistent housing slowdown, weak trade, record youth unemployment and a lack of optimism at a time when many hope the economy will bounce back.
“It’s not enough,” Lu Ting, Nomura’s chief China economist, said of the expected rate cut. “The real reason for weak growth right now is not high interest rates. It’s more about confidence in the future.”
Six months after authorities abandoned the zero-Covid regime that isolated China from the rest of the world, China’s economy remains a global outlier. Beijing has not used the kind of fiscal or monetary stimulus that other economies have used during the pandemic. While many policymakers elsewhere are now trying to curb inflation, prices have stagnated in China.
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The country’s reopening was expected to boost the global economy, but failed to revive even animal spirits at home.
“We thought things would be much better after the outbreak, but that’s not the case now,” said Zhu Tian, an economics professor at the China Europe International Business School in Shanghai. “Everything that happened in the past three years has obviously lowered people’s sentiment.”
China’s stimulus woes date back to the early stages of the pandemic. In mid-2020, China, like other major economies, experienced a boom in housing and stock prices, prompting bubble warnings from top regulators. Policymakers began deleveraging the debt-laden housing market, sparking an industry-wide crisis and prompting developers to default. Construction activity stopped.
In stark contrast to U.S. and European policies aimed at directly supporting households and businesses, Beijing has spent heavily to build a sprawling anti-coronavirus agency, mandating mass testing and imposing a city-wide lockdown, curbing the spread of the virus. Economic Growth.
Data on Thursday will add to the prospects of meeting Beijing’s already modest 5 percent economic growth target for this year, the lowest in decades. The property market, which has been in a prolonged slump since 2021, has yet to recover, with new home sales in 30 major cities in the quarter at just 75% of 2019 levels, Macquarie said.
In early 2020, the PBOC cut the headline medium-term lending facility (MLF) rate from 3.3% to 2.95%, but has since cut it only slightly further to 2.75%. According to market participants, the central bank is expected to cut interest rates by just 10 basis points on Thursday, the same amount it cut its reverse repurchase rate this week.
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Expectations for a rate cut have been rising in closely watched official statements. Hu Weiqiang, Macquarie’s chief China economist, said PBOC Governor Yi Gang’s reference this month to “strengthening counter-cyclical adjustments” suggested China was moving toward easing. “Another policy inflection point is looming,” Hu said.
Economists largely agree that any drastic changes in monetary policy are unlikely. At a recent private meeting, officials including Liu Guoqiang, vice-governor of the People’s Bank of China, opposed monetary stimulus alone, according to a person present.
HSBC’s Erin Xin said low inflation gave the PBoC “room to act if necessary”, but she did not expect “massive stimulus”. China Europe International Business School’s Zhu noted that the government is constrained by downward pressure on the exchange rate.
Analysts expect the MLF rate cut to be accompanied by non-monetary measures. Macquarie’s Hu predicts a coordinated easing of restrictions on property purchases, infrastructure spending and bank lending.
Chetan Ahya, chief Asia economist at Morgan Stanley, expects a 100 million yuan ($140 billion) infrastructure package and tax subsidies for consumers. “Overall, we think you should see this kind of policy support broaden the recovery in the second half of the year,” he told a media conference on Tuesday.
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The specter of inflation still holds back stronger action. “Western economies have gone too far in directly subsidizing businesses and distributing funds to households — they are paying the price for inflation,” said Guan Tao, chief economist at Bank of China International and former head of the State Administration of Foreign Exchange. “But we’re a little too conservative.”
On the ground, there are also mixed signals. In Shanghai’s Pudong district, lunchtime financial workers flock to luxury stores. But at a nearby mall, where retail spaces are boarded up, the stores that were open were quiet. “There is no recovery compared to last year,” said a Toys R Us clerk, blaming a lack of tourists.
An economic researcher at a mutual fund in Shanghai cited recent consumer support for sectors such as autos, but did not expect more aggressive measures such as cash handouts in Hong Kong to spur spending.
Amid expectations for policy easing this week, few observers expected a sudden departure from China’s Covid-era cautious approach. But some think that’s what’s needed now.
“It had to be something completely different,” Zhu said. “What China needs is a positive shock, one that can change the mood of the entire business community.”
Additional reporting by Wang Xueqiao in Shanghai and Lin Dehua and Hudson Lockett in Hong Kong