China’s Economic Stimulus: A Drop in the Ocean?
On Tuesday, Beijing announced a series of measures aimed at reviving China’s struggling economy. The People’s Bank of China, the country’s central bank, will inject 800 billion yuan (approximately $114 billion) into the stock market, while policymakers are discussing a fund to stabilize stocks and relaxing reserve requirements for banks. Additionally, interest rates were lowered, and homebuyers can now put down less money on their purchases.
Wall Street reacted with euphoria, hoping that the Chinese Communist Party is finally taking decisive action to address the country’s economic woes. However, this optimism may be misplaced. China’s economy is plagued by a lack of consumer demand and a property market in deep correction. The government’s measures, while welcome, are insufficient to address these fundamental issues.
Xi Jinping’s administration is ideologically opposed to direct stimulus checks, which would provide a much-needed boost to consumer spending. Moreover, the scale of the stimulus required to fix the property market is staggering – estimated to be around 7.7 trillion yuan. The measures announced are merely a drop in the ocean, and policymakers know it.
The root of the problem lies in the fact that 70% of Chinese household wealth is tied up in property, which has seen prices fall by up to 30% in Tier 1 cities since 2021. This has led to deflation spreading to the wider economy, with consumer price inflation at a three-year low. As a result, consumers are reluctant to spend, and businesses are not borrowing.
Experts argue that the most effective way to stimulate demand in a deflating economy is to provide direct support to households. However, Xi’s adherence to Austrian economic principles means that he is unlikely to adopt such measures.
In reality, the recent announcements are more about providing a temporary respite from bad economic news rather than a comprehensive solution to China’s economic problems. The measures are tiny compared to previous stimulus packages, and the country’s debt issues remain unresolved.
Wall Street’s excitement may be short-lived, as the reality of China’s economic situation sets in. The Chinese Communist Party is caught between a rock and a hard place, trying to balance the need to stabilize the economy with the risk of exacerbating debt and inflation. One thing is certain – the dragon is not about to take off anytime soon.
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