China has found itself grappling with a serious shortage of aggregate demand, which has led to concerns about the country’s economic slowdown. As the world’s second-largest economy, this poses a significant challenge not just for China but for the global economy at large.
However, it appears that the Chinese government, led by President Xi Jinping, is stepping up to tackle the issue head-on. With a combination of fiscal and monetary stimulus and potential bailouts for banks and local government financing vehicles (LGFVs), the country seems poised to kickstart growth once again. In fact, recent announcements suggest a radical shift in the government’s strategy to prevent further economic decline.
The People’s Bank of China (PBOC) took the lead in reviving market sentiment. In a rare, globally televised press briefing, the central bank indicated it was ready to inject liquidity into the economy by lowering the cost of borrowing. A key move was the lowering of the interest rate on one-year loans to banks—the largest rate cut on record. The PBOC’s actions aimed to make money cheaper to borrow, encouraging lending and investment in a country where liquidity had been tightening.
The impact was immediate. Stock markets responded with sharp gains, signaling investor confidence in the central bank’s capacity to stabilize the economy. The next day, the government followed up by issuing rare cash handouts and floating new subsidies to address unemployment, particularly targeting recent graduates struggling to find jobs.
Politburo’s Policy Shift: Pro-Growth Measures and Real Estate Support
The PBOC’s actions were just the start of a broader government-led stimulus effort. By Thursday, the 24-member Politburo, China’s top decision-making body led by President Xi, announced an extensive package of pro-growth policies. In a marked departure from previous reluctance to roll out large-scale stimulus measures, Xi’s administration committed to boosting fiscal spending and stopping the decline of property prices—a sector that has been critical to China’s economic engine for decades but is now facing a downturn.
This announcement represented a significant shift in Xi’s approach, who had resisted major fiscal stimulus in the past, preferring to focus on long-term structural reforms. However, the dire state of China’s real estate sector and the ongoing slump in consumer demand forced the government’s hand. By vowing to prevent further drops in property prices and increase fiscal spending, the Politburo sent a clear message that the government is committed to preventing a full-blown economic crisis.
Furthermore, the government unveiled measures to boost domestic consumption, emphasizing that it was “necessary to respond to the concerns of the masses.” This focus on the real economy, particularly housing and consumer spending, is seen as a direct response to the rising social discontent over stagnant wages, high youth unemployment, and unaffordable housing.
Banks and Local Government Bailouts: A Crucial Step
While these stimulus measures are crucial, perhaps the most important move in China’s playbook is the potential bailout of its massive banking sector. Reports have emerged that Beijing is considering injecting up to 1 trillion yuan (approximately $142 billion) into the country’s largest state-owned banks. This would be the first such capital injection since the 2008 global financial crisis, underscoring the severity of the current economic challenges.
Such an injection would effectively amount to a bailout of China’s banks, which have been reluctant to lend amid rising bad debts and concerns over financial stability. For years, analysts have debated whether China’s banks are as impervious to risk as some believe, pointing to the “unitary state” theory, which argues that the state and banks operate as one entity. However, this theory has been questioned in recent times, as banks, fearing repercussions from the government if they fail, have shown a tendency to limit lending.
By injecting fresh capital into the banks, the government would give them a cushion, restoring their confidence to lend again. This move could prove to be a critical factor in getting credit flowing, which is essential for any sustained economic recovery. When banks are confident enough to lend, businesses and consumers alike can access the credit they need, thereby stimulating investment, consumption, and overall economic growth.
Local Government Financing Vehicles: The Next Frontier
Beyond the banks, China’s regional economies are heavily dependent on Local Government Financing Vehicles (LGFVs), which have become an essential source of funding for infrastructure projects and local development. LGFVs are now struggling under a mountain of debt, raising concerns about defaults that could destabilize local economies.
While there has been no official announcement of a bailout for LGFVs, many analysts believe it is only a matter of time before the central government steps in. Even without a full-scale bailout, the measures already being implemented—such as fiscal stimulus and increased lending—are expected to relieve some of the financial pressures on these vehicles.
While China is battling its own economic issues, the United States is undergoing a fundamental shift in its economic policy with a renewed focus on industrial policy. The CHIPS and Science Act, spearheaded by the Biden administration, is designed to revitalize the domestic semiconductor industry, addressing both national security concerns and the need to reduce reliance on Chinese imports.
Recently, TSMC, the world’s largest contract chipmaker, announced that its new Arizona plant had begun manufacturing chips for Apple—a significant milestone for the CHIPS Act. Despite initial delays, the project is now moving ahead of schedule, demonstrating the success of the U.S. government’s efforts to boost domestic chip production. This stands in stark contrast to industrial projects in other sectors where government-led initiatives have often stumbled due to bureaucratic inefficiencies.
The U.S. government’s strategy has been to spur private sector investment with subsidies, a model that seems to be working for advanced technologies like semiconductors and solar power. However, the debate over industrial policy is far from settled. Critics argue that government intervention distorts the market, while supporters maintain that national security concerns justify such measures, especially in light of rising geopolitical tensions with China.
Tariffs and the National Security Argument
One of the more contentious issues between China and the U.S. is the imposition of tariffs. While tariffs were initially seen as a tool for protecting domestic industries, they have increasingly become a part of the national security narrative. President Biden has taken a hard stance on Chinese imports, limiting the “de minimis” exemption that allows Chinese companies like Temu and Shein to ship small, cheap packages to the U.S. without paying tariffs.
Furthermore, Biden’s administration is contemplating a complete ban on Chinese components in internet-connected cars, citing concerns over potential sabotage. Former President Trump, meanwhile, continues to push for more tariffs, framing them as a cure-all for America’s economic woes.
However, as some economists have pointed out, tariffs have their limitations. Exchange rate adjustments can often negate the intended effects of tariffs, and they can also increase costs for domestic manufacturers by raising the price of imported components. While tariffs may be necessary in certain strategic industries, such as semiconductors, they are not a silver bullet for addressing all of the economic challenges posed by China.
Long-Term Implications for Global Trade
China’s recent stimulus measures, combined with the growing divide between the U.S. and China over trade and technology, suggest that the global economic landscape is in for a period of profound transformation. The U.S. is increasingly looking inward, focusing on rebuilding its manufacturing base and reducing its reliance on Chinese imports. Meanwhile, China is grappling with its own internal challenges, attempting to reignite growth in the face of a slowing economy.
Both countries are pursuing strategies aimed at securing their economic futures, but in very different ways. For China, the focus is on shoring up its financial system and stimulating domestic demand through fiscal and monetary policies. For the U.S., the emphasis is on fostering private sector investment in key industries while using tariffs and trade restrictions to protect national security.
The coming years will reveal how successful these strategies are. But for now, China’s bold stimulus measures and the U.S.’s aggressive industrial policy mark a new chapter in the evolving economic relationship between the two superpowers.
China’s recent flurry of stimulus measures—whether through monetary easing, fiscal spending, or potential bank bailouts—signals a determined effort to tackle the deep-seated challenges in its economy. At the same time, the U.S. is pursuing a more industrial-focused economic strategy, using government intervention to encourage private investment in critical industries like semiconductors and clean energy. Both nations are taking bold steps to secure their economic futures, but the success of these strategies remains to be seen.
For now, the world watches closely as China and the U.S. navigate through this complex economic terrain. With both countries making significant policy shifts, the global economic order may be on the cusp of a new era, one shaped by national security concerns, industrial policy, and the ever-evolving relationship between the world’s two largest economies.
