China’s relentless economic growth, once the envy of the world, seems like a distant memory today. For decades, the country dazzled with double-digit growth rates, creating an economic juggernaut that reshaped global trade and geopolitics. But recent years have seen China’s economy face an uncharacteristic slowdown, struggling under a unique blend of internal and external crises.
Youth unemployment has surged, the housing market suffers from severe oversupply, and consumer prices are inching closer to deflationary territory. This has forced the Chinese government to intervene with ambitious stimulus measures aimed at reviving the faltering economy.
According to a recent research note from Deutsche Bank, China’s new round of stimulus may become the “largest in history” in nominal terms. Yet, while the scale may be monumental, the details are still emerging. What exactly is in this stimulus package? And crucially, has China walked this road before, and can it expect similar outcomes?
On September 24, Pan Gongsheng, governor of the People’s Bank of China (PBOC), unveiled the boldest set of economic interventions since the pandemic. The package introduced sweeping measures aimed at restoring confidence in China’s economy and fostering growth.
- Lowering Mortgage Rates: China reduced mortgage rates for existing homes, a crucial move aimed at reviving the sluggish housing market. As property prices stagnate and unsold housing stocks pile up, this measure is designed to stimulate demand.
- Reducing Bank Reserve Requirements: By reducing the amount of cash commercial banks must hold in reserves, China plans to inject approximately 1 trillion yuan (US$140.5 billion) into the financial system. This move is expected to increase liquidity, enabling banks to lend more freely, fostering investment and consumption.
- 800 Billion Yuan Capital Market Strengthening: This included a new 500 billion yuan monetary facility designed to help institutions access funds more easily to buy stocks and a 300 billion yuan re-lending facility to speed up the sale of unsold housing.
These measures represent an attempt to stabilize key sectors, particularly the housing market and financial markets, which have experienced severe turbulence in recent months.
Initially, markets reacted with overwhelming optimism. In the last week of September, stock markets in Shanghai, Shenzhen, and Hong Kong posted their biggest weekly rise in 16 years. This surge reflected growing investor confidence that the Chinese government was serious about reversing the economic downturn.
That confidence was further buoyed by additional signs of intervention at a Politburo meeting on September 26, where President Xi Jinping emphasized the urgency of bold economic action. Xi encouraged officials to take significant risks in helping the economy, signaling that the government was prepared to push forward aggressively. On the same day, seven government departments released a joint policy package aimed at stabilizing China’s 500 billion yuan dairy industry, which has been grappling with falling milk and beef prices since 2023.
However, this initial euphoria proved short-lived. Following China’s National Day holiday in early October, expectations for further stimulus measures were high. But when the National Development and Reform Commission brought forward just 100 billion yuan from the 2025 budget, it wasn’t enough to sustain market optimism. On October 9, Chinese stocks experienced their sharpest drop in 27 years, exacerbating concerns over the efficacy and timing of the government’s interventions.
Adding to the uncertainty, China’s Ministry of Finance hinted that there was “ample room” to raise more debt, but provided no specifics on new stimulus measures. The lack of clarity only deepened market anxieties, prompting further sell-offs and a mood of pessimism in global markets.
Earlier this year, during the Third Plenary Session, Chinese authorities had emphasized their commitment to achieving the country’s modest 5% growth target for 2023. In the context of China’s meteoric growth trajectory since its reform era, this target appeared almost conservative. Yet, by September, as economic data continued to underwhelm, Xi’s tone shifted subtly, from “remain firmly committed” to “strive to fulfill” the growth target. This change in language reflected the government’s growing acknowledgment that hitting the target might be more challenging than originally anticipated.
The evolution of China’s economic policy over the past few decades has relied heavily on stimulus measures to counter periods of economic stagnation. Massive interventions, often focused on infrastructure and housing, have historically delivered impressive results—though not without significant costs.
China’s experience with large-scale stimulus packages is not new. Following the 2008 global financial crisis, the State Council rolled out a 4 trillion yuan package that successfully helped the country weather the storm and was credited as a stabilizing force for the global economy. The package boosted infrastructure spending, supported local governments, and helped China avoid the worst of the recession that gripped much of the world.
However, this stimulus also came with its own set of long-term challenges. Local government financing ballooned, resulting in trillions of yuan in debt. Moreover, the unregulated expansion of shadow banking—the sector operating outside traditional banking regulation—gained momentum, contributing to growing financial instability.
Similar policies were introduced in 2015 following stock market turbulence, and again in response to the economic disruption caused by the COVID-19 pandemic. While these measures succeeded in reigniting growth, they did little to address the structural imbalances in China’s economy. An over-reliance on housing, debt-driven investment, and unsustainable consumption patterns has led to growing concerns about the sustainability of China’s development model.
As the world waits for more details on China’s latest stimulus package, economists are divided on its potential impacts. While it is clear that significant liquidity will be injected into the economy, it remains uncertain how this will translate into real growth.
One of the key elements to watch will be the effect on China’s stock markets. Much of the stimulus is designed to increase borrowing, lending, and liquidity in capital markets, which could result in a wealth effect—rising asset prices, making investors and consumers feel wealthier and more willing to spend. If asset prices increase in a sustained manner, it could create a ripple of optimism across China’s economy, spurring demand in sectors like housing and retail.
From a global perspective, this could have far-reaching implications. As China’s demand for commodities and raw materials increases, economies like Australia—whose fortunes are deeply intertwined with Chinese demand for iron ore, tourism, and education—could see significant benefits. Likewise, higher Chinese demand for goods and services may provide a broader boost to the global economy, leading to a self-reinforcing cycle of growth.
While a rising stock market and increased asset values might seem like good news, the risks of an asset-driven growth model cannot be overlooked. Depending too heavily on asset price increases to sustain growth can lead to destabilizing effects, particularly if those price rises disproportionately benefit wealthier segments of society.
In 2015, China experienced a stark reminder of the dangers of excessive financialization. The country’s “Black Monday” stock market crash raised alarms in Beijing and prompted President Xi to issue a warning that “housing is for living in, not for speculation.” Such financial excesses could exacerbate inequality and lead to long-term imbalances within the economy.
Moreover, China’s broader economic issues—such as its aging population, the ongoing trade war with the United States, and decarbonization efforts—continue to cast long shadows over the country’s growth prospects. Stimulus packages, while effective in providing short-term relief, do little to address these deep-rooted structural issues. The Chinese government must walk a tightrope between reviving growth and preventing a long-term debt crisis.
China’s new round of stimulus could represent a pivotal moment in its ongoing economic story. On one hand, if executed well, the package could reignite growth and restore confidence both within China and globally. On the other hand, an over-reliance on debt-driven growth and volatile capital markets could have destabilizing consequences.
China is navigating uncharted waters, seeking to balance economic revival with the need for sustainable, long-term development. How this plays out will not only determine the future of the world’s second-largest economy but will have profound implications for the global economy as well. In many ways, the world is watching China—perhaps even more closely than China is watching itself.
