Update: Cover Story: China’s Stimulus Bomb Sparks Optimism, but Economy May Still Struggle

The recent aggressive stimulus measures announced in China have led to a significant increase in the CSI 300 Index, marking its largest weekly gain in nearly 16 years. Ahead of the National Day holiday, millions in China anticipated these changes. This prompted major foreign banks such as Goldman Sachs and JP Morgan to raise their GDP growth forecasts, although some analysts remain skeptical about the long-term effects of these measures [para. 1][para. 2].

The Politburo took an unusual step in moving macroeconomic matters up to September, indicating a high level of urgency to stabilize the economy under Chairman Xi Jinping’s leadership. This was in reaction to a weaker-than-expected second-quarter GDP growth of 4.7%, hampered by a prolonged property slump, weak consumption, and investment. Typically, these discussions occur in April, July, and December, but the early deliberation underscores the leadership's concern [para. 4][para. 5].

Financial institutions also responded to the stimulus plans. The People’s Bank of China (PBOC) reduced the 7-day reverse repo rate and the reserve requirement ratio (RRR) for banks. Standard Chartered Bank viewed these steps as a bold action, estimating further rate cuts and additional RRR reductions by the end of the year [para. 7][para. 10][para. 12]. The National Financial Regulatory Administration also rolled out key measures for the banking sector to support small and micro-enterprises and boost core capital [para. 17].

Market responses were immediate and positive. The CSI 300 Index surged over 15% while major foreign banks revised their growth forecasts upwards. For example, Goldman Sachs now projects a growth of 5.2% for the Chinese economy in 2024, up from 4.8% [para. 22][para. 23]. Economists remain cautious about long-term outcomes, and some experts argue that sustained recovery requires more robust government action [para. 27][para. 28]. Liu Shijin highlighted the potential need for a 10 trillion-yuan stimulus to ensure long-term economic health [para. 29].

The PBOC's recent rate cuts aim to boost lending and economic activity, as well as address slow growth in broader monetary indicators like M2 and M1. The central bank injected 300 billion yuan into the financial system and projected that the latest RRR cut would release about 1 trillion yuan into the economy [para. 32][para. 34][para. 39].

Despite years of downturn in the property market, new measures include lower mortgage rates and decreased down payment requirements to stimulate demand. Banks are expected to reduce mortgage rates by 0.5 percentage points, benefiting around 50 million households [para. 41][para. 42]. However, market insiders caution that these measures may not suffice to boost demand, citing difficulties in negotiating loan extensions despite policy extensions [para. 45][para. 46][para. 47]. Local authority involvement and state-owned enterprises’ participation in purchasing unsold real estate are also considered, but progress remains slow [para. 49].

Lower interest rates pose challenges for the banking sector, squeezing profit margins and straining capital adequacy. In response, Governor Pan expressed optimism that the central bank's tools could balance economic growth with banking sector health despite the narrowing interest spreads [para. 52][para. 54]. The government aims to address these challenges by boosting core tier-1 capital of major state-owned banks through phased initiatives [para. 59][para. 60].

Former deputy head Liu advocates for a significant stimulus package, focusing on public services to boost consumption and investment, emphasizing that fiscal intervention is critical for economic recovery [para. 66][para. 67]. The upcoming session of the NPC Standing Committee in late October will be pivotal in potentially greenlighting new fiscal initiatives [para. 70][para. 71].