World Stock Watch

China’s economic growth is facing a significant hurdle, and it’s not what you’d expect. Despite the central bank’s recent efforts to inject liquidity and lower borrowing costs, the real issue lies in persistently weak consumer demand. The world’s second-largest economy is grappling with strong deflationary pressures, and analysts warn that it may miss its 5% growth target this year due to a sharp property downturn and frail consumer confidence.

The recent policy measures, while welcomed by the market, are seen as insufficient to address the root cause of the problem. Experts argue that only fiscal policies that put money directly into consumers’ pockets through higher pensions and social benefits can stimulate growth. “The central bank’s policies were a step in the right direction, but they don’t tackle the main issue,” said one economist. “What’s needed is a fiscal package that boosts demand and puts money in people’s pockets.”

The current stimulus package, although the boldest since the pandemic, is deemed too small to make a significant impact. The 1 trillion yuan injection into the financial system may not translate to real economy lending, given weak credit demand from households and businesses. Moreover, cuts in mortgage rates will only release a modest 150 billion yuan annually to households, equivalent to a mere 0.12% of annual economic output.

Chinese consumers are known to be cautious, saving most of their extra income rather than spending it. To make a real difference, economists suggest that the government should consider demand-side support, such as consumption vouchers or similar policies. This would require a significant shift in spending towards consumers, addressing the country’s wide investment-consumption imbalance.

While the path forward is unclear, one thing is certain – China needs to rethink its economic strategy to get its growth back on track. The question is, will the government take the necessary steps to rebalance its economy and put money in people’s pockets, or will it stick to its traditional investment-driven approach? Only time will tell.