Is the fresh stimulus a turning point for China’s economy? Via Investing.com

Investing.com — China’s latest economic stimulus package, introduced in September 2024, has sparked debate over whether it could signal a turning point in the country’s economic slowdown.

This “cocktail of monetary easing”, as it has been described, features a combination of interest rate cuts, reductions in mortgage costs and injections of liquidity aimed at stabilizing financial markets.

Despite the expansion of the initiative, analysts at BCA Research believe these measures are insufficient to drive a meaningful recovery, as deep-rooted structural challenges remain largely unaddressed.

At the heart of this new stimulus are five major components. First, the People’s Bank of China announced a 50 basis point reduction in the required reserve ratio for banks in order to increase liquidity in the financial system.

This was accompanied by a 20 basis point cut in the 7-day reverse repo rate, which is expected to reduce borrowing costs through marginal cuts in the prime lending rate and medium-term credit facility.

In addition, mortgage rates were also cut by 50 basis points, with down payment requirements reduced for the purchase of a second home to boost activity in the housing market.

In addition, the PBoC introduced an RMB 800 billion support package to provide liquidity for stock purchases by securities firms and listed companies to support the stock market.

Finally, additional funding was given to state-owned enterprises to convert unsold residential units into low-cost rental housing in an attempt to ease pressures on the real estate sector.

Despite these measures, BCA Research remains skeptical of their ability to revive the wider economy. For example, while the reduction in mortgage rates may bring relief to some households, the aggregate savings it will generate – about RMB 150 billion annually – represent only a 0.3% increase in personal consumption.

This is too small to significantly alter the trajectory of consumer spending. More importantly, the labor market is under significant pressure, with deteriorating job prospects and stagnant wages hampering any potential recovery in household consumption.

Without stronger employment growth, any increase in lower borrowing costs is likely to be modest at best.

Similarly, while the RRR cut may increase bank liquidity, the real problem facing China’s economy is weak loan demand.

With the prime lending rate still hovering around 5% and deflationary pressures continuing, even marginal cuts in borrowing costs are unlikely to stimulate new credit demand.

Households and businesses remain hesitant to borrow, especially with falling property prices casting a shadow over consumer confidence. The housing market, a key driver of China’s growth in the past, continues to struggle, with downward pressure on prices likely to persist.

Beyond the financial system, local governments remain limited in their ability to stimulate growth. Anti-corruption investigations have increased in recent years, leading to increased caution among local officials, many of whom are reluctant to initiate new infrastructure projects or take on additional debt.

This reluctance has reduced one of the traditional levers of economic expansion, as local government spending has historically played a vital role in stimulating activity, especially in times of recession.

BCA analysts argue that China’s current predicament – a combination of debt deflation and what they describe as a “balance sheet recession” – requires much more aggressive interventions than the announced measures.

What the economy really needs, they suggest, is large-scale quantitative easing targeting the housing market and fiscal transfers to households to boost confidence and spending power.

The latest stimulus package, however, remains piecemeal and unlikely to address these deeper issues. Without more comprehensive fiscal policies, the economy is unlikely to see a significant recovery in the near term.

For investors, the outlook remains cautious. The stimulus may provide temporary support to the stock market, particularly Chinese onshore stocks, which BCA upgraded to overweight in global and emerging market portfolios.

However, broader global market conditions could limit upside, especially in the face of rising geopolitical risks and a potential slowdown in global trade.

As such, while Chinese A-shares may offer some opportunities, BCA advises a more neutral stance on Chinese offshore shares and advises against taking large long positions in Chinese shares for absolute return investors, particularly if global markets enters a risk reduction phase.