The Governor of China’s central bank, Pan Gongsheng announced an ambitious set of economic measures aimed at revitalizing the nation’s faltering economy. This announcement came just a week before the 75th anniversary of Communist Party rule and signaled China’s urgency to address concerns that it may not meet its 5% annual growth target. With the global economic landscape in flux and internal pressures mounting, Pan’s moves are being closely scrutinized by analysts worldwide.
The central bank’s stimulus package reflects a significant shift in policy designed to inject liquidity into the economy and stimulate growth. Among the notable measures was a 0.5 percentage point reduction in the required cash reserves that commercial banks must hold with the central bank. This move, expected to free up around 1 trillion yuan ($137 billion) for new lending, has the potential to rejuvenate borrowing and spending in the broader economy. In a further boost, Pan indicated that another cut of 0.25 to 0.5 percentage points could follow later in 2024, signaling an ongoing commitment to monetary easing.
In a parallel move, the central bank reduced the rate at which it lends to commercial banks by 0.2 percentage points. This reduction is likely to encourage financial institutions to pass on lower borrowing costs to businesses and consumers, thus stimulating economic activity. Pan also hinted at a possible 20 to 25 basis point cut in the borrowing rate for top-rated credit holders, a move aimed at encouraging more private sector investment.
The policy interventions also targeted China’s ailing property market, which has been a source of economic instability since 2021. In August, house prices fell at their fastest rate in nine years, exacerbating fears of a more severe downturn in the real estate sector. To counter this, the central bank reduced the deposit requirement for those purchasing second homes from 25% to 15%, hoping to reignite demand and stabilize housing prices.
While these steps are expected to provide short-term relief, concerns persist about the long-term sustainability of China’s property market. Analysts caution that while easing credit could bolster home sales and prices, it may also carry the risk of rekindling speculative activity, leading to another potential property bubble.
Financial markets responded positively to the stimulus package. Within hours of the central bank’s announcement, China’s main stock index surged by more than 4%, marking its strongest single-day rally in 16 years. This rise was followed by a 1% increase in the global benchmark price of oil, indicating that investors are betting on increased demand for commodities from China, the world’s largest consumer of raw materials.
The momentum continued throughout the week, with Chinese shares climbing by approximately 20% in the five days following the announcement. Market sentiment remains cautiously optimistic, as investors view these measures as a step towards stabilizing the economy.
However, market analysts have pointed out the potential risks of an expansionary policy, particularly in the property sector. The government’s restrictions on developers’ borrowing since 2021 triggered a wave of defaults, which has left the sector in a precarious state. The recent cuts to borrowing costs, though designed to revive activity, could risk overheating the market again.
The longer-term impact of the central bank’s package remains uncertain. It will likely take one to two years before the full effects of the new credit expansion manifest in the broader economy. The immediate objective is to catalyze domestic growth, and it is expected that the lowered lending rates and financial stimulus will kickstart construction, increase consumer spending, and drive demand for capital goods.
China has long been striving to transition from an export-dependent model to one that is driven by domestic consumption. This shift is seen as essential for sustainable long-term growth, especially as the global trade environment becomes increasingly volatile. China’s exports, which peaked at 36% of GDP in 2006, have since fallen to 19.7% in 2023. Yet, this ratio remains high compared to major economies like the United States, where exports accounted for just 11.6% of GDP in 2022.
As part of this rebalancing effort, China aims to reduce its vulnerability to external shocks, such as the tariffs introduced by the U.S. in May 2024 on Chinese electric vehicles, solar equipment, and batteries. These measures have dented demand for Chinese exports in the U.S. market but have done little to dislodge China from its dominant position in global supply chains. The country’s extensive manufacturing capabilities and its growing domestic market continue to make it a global economic powerhouse, despite challenges on the trade front.
China’s property market remains a central concern in the broader economic picture. Since 2021, when the government imposed strict limits on how much property developers could borrow, the sector has experienced a sustained downturn. The result has been a series of defaults by major developers, a collapse in property prices, and a significant slowdown in construction activity.
While the central bank’s measures may provide short-term relief, they are unlikely to resolve the deeper structural issues plaguing the property market. Goldman Sachs estimated earlier in 2024 that it would require more than 15 trillion yuan to address the systemic challenges facing the sector—far more than the current stimulus package can provide. Moreover, with house prices continuing to fall and a significant amount of unsold inventory weighing on the market, it could be some time before any meaningful recovery takes place.
China’s economic policies and performance have far-reaching implications for the global economy. The country’s sheer size, its role as a manufacturing hub, and its deep integration into global supply chains mean that any significant changes in China’s economy are felt worldwide.
Despite the challenges, China’s growth target of 5% remains significantly higher than those of most advanced economies. In the G7, for example, annual growth rates are expected to remain below 2%—except in the United States, where higher rates are forecast. This disparity underscores China’s enduring potential as an engine of global growth, even as it grapples with domestic challenges.
China’s economic strength is also being bolstered by major infrastructure projects, particularly the Belt and Road Initiative (BRI) and investments spearheaded by the Eurasian Development Bank. These projects are enhancing China’s connectivity with resource-rich countries in Central Asia through an extensive network of roads, railways, and energy pipelines. In 2023, for instance, China secured a major gas supply agreement with Kazakhstan, while mineral exports from Mongolia to China saw a 3% increase between 2023 and 2024.
China’s growing trade relationships within the BRICS group—Brazil, Russia, India, China, and South Africa—also position it well for future growth. In recent years, China has cultivated closer ties with these emerging markets, and its leadership in expanding the BRICS group to include new members such as Iran, Saudi Arabia, Egypt, and the UAE is expected to further enhance its global influence.
Predicting the long-term outcomes of China’s latest economic stimulus measures is a complex task. While the immediate reaction from financial markets has been positive, and certain sectors such as construction and consumer goods are expected to benefit, much will depend on the broader global economic environment and China’s ability to manage its domestic challenges.
Pan Gongsheng’s central bank has laid the groundwork for a potential resurgence in growth, but the road ahead is far from straightforward. If the property market crisis worsens or if global demand for Chinese exports weakens further, China may struggle to achieve its ambitious growth targets. However, with robust infrastructure investments, expanding trade partnerships, and a commitment to economic rebalancing, China still has significant tools at its disposal.
As the world watches closely, it remains to be seen whether these measures will lead to sustained growth or simply provide a temporary boost. What is clear, however, is that China’s economic trajectory will continue to have profound implications not only for its own citizens but also for the global economy at large. A strong and stable China could help reinvigorate global trade and drive economic recovery in a world still grappling with the aftershocks of the pandemic and geopolitical tensions.
