**Economic Stimulus Needed to Revive China’s Slowing Growth**
Despite recent interest rate cuts, China’s economy requires more comprehensive measures to boost growth, according to analysts. The People’s Bank of China’s surprise announcement to cut rates, including those on existing mortgages, sent mainland Chinese stocks soaring. However, the bond market remains cautious, with the Chinese 10-year government yield falling to a record low before rebounding.
Experts believe that fiscal spending on housing, backed by the central bank’s balance sheet, is crucial to reflate the economy. Weak domestic demand has plagued China, and more efforts are needed to bolster the housing market. The country’s economy grew by 5% in the first half of the year, but concerns persist that full-year growth may miss the target of around 5% without additional stimulus.
Industrial activity has slowed, and retail sales have grown by barely more than 2% year-on-year in recent months. The Chinese Ministry of Finance has maintained a conservative stance, despite a rare increase in the fiscal deficit earlier this year. A significant shortfall in spending remains, and authorities may need to increase the deficit and issue additional treasury bonds to meet their fiscal target.
Analysts expect the Chinese 10-year government bond yield to remain relatively low, with some predicting it will not drop significantly in the near future. The gap between U.S. and Chinese government bond yields reflects divergent market expectations for growth in the two largest economies. The Federal Reserve’s recent rate cut has eased pressure on Chinese policymakers, but more fiscal stimulus is needed to achieve meaningful economic growth.
In the short term, confidence in the acceleration of economic growth has improved, but high leverage in Chinese corporates and households makes them unwilling to borrow more, weakening the effects of loose monetary policy. As such, a combination of monetary easing and fiscal stimulus is necessary to expand credit and transmit money to the real economy.
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