China’s economic stimulus measures must focus on consumer recovery

• China has announced a series of supportive policies to boost its economy.
• But last week’s stimulus onslaught failed to provide fiscal support to discouraged consumers in China.
• China needs to spend more on its citizens and offer incentives to bring back buyer demand

China’s latest stimulus blitz offers everything but one key solution: new incentives to revive consumers.

In a rare news conference Tuesday, Beijing showed renewed determination to reverse the country’s economic decline. Adrenaline-pumping policies were announced, ranging from mortgage financing to lower interest rates and lower reserve requirements.

JPMorgan estimates that the latter will inject approximately 1 trillion yuan into the country’s banking system. In addition, there are other liquidity support measures and plans for an equity stabilization fund.

Markets praised the measures as a step in the right direction and a significant improvement over Beijing’s past piecemeal support initiatives. The country’s stock market quickly gained on the news, leading to its biggest weekly gain since 2008.

But economists, while also encouraged, caution against overestimating what these policies can achieve.

“While the numbers appear large and the efforts appear far-reaching, simply announcing a stimulus program may not be enough to lift the entire Chinese economy out of the doldrums,” Liz Young Thomas, SoFi’s director of investment strategy, said in a written comment.

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“This economy is struggling with many deep, structural and fundamental problems that cannot be solved simply with a stimulus package,” Tianlei Huang told Business Insider. “I think it’s probably a little too early to celebrate.”

A research fellow at the Peterson Institute for International Economics explained that Tuesday’s stimulus will be offset by a significant domestic fiscal collapse. The government simply hasn’t spent enough on consumers, even though economic recovery depends on them.

A lack of domestic spending is at the heart of China’s turmoil: consumers are so focused on savings that China is fighting a deflationary spiral. Meanwhile, buyers are reluctant to touch real estate, a sector so large that it accounts for as much as 30% of the country’s GDP, Huang said.

Despite its size, the market suffers from debt, insolvency and unsold inventory.

According to Huang, Beijing needs to start spending more on people, instead of consistently focusing on areas such as infrastructure. Addressing the deteriorating housing market could also boost confidence, given how reliant many people are on the labor market.

While Tuesday’s stimulus package did not include fiscal support, Chinese officials appear to have already addressed it. Reuters reported on Friday that China plans to issue special yuan treasury bonds worth more than $284 billion – a move expected to provide new stimulus.

This came a day after Chinese leaders noted the need to support household consumption and a stable real estate market. Reuters reported that the rare comments were made during the monthly meeting of the Communist Party’s Politburo.

Meanwhile, Barclays cited that some policymakers had recently advocated for an even larger fiscal stimulus package worth as much as $1.4 trillion yuan to be rolled out over two years.

The bank sees this as a “bazooka” stimulus scenario that would enable recovery of the housing surplus, boost consumption, and further debt reduction and financing of public services. According to Barclay estimates, this could result in GDP growth of up to 5% in 2025.

The scenario announced on Friday will result in a milder recovery, raising next year’s dynamics to 4.4%.

When it comes to this year’s growth, economists have worried that Beijing may miss its 5% growth target. Huang said that even if China pledges more fiscal support in the near term, it may be too late this year to change the situation.

He noted the delay between the announcement of the bonds and the actual issuance of the bonds. Winter is also approaching, which could slow down activity in sectors receiving stimulus, such as infrastructure.

“It sounds strange, but this was actually one of the main reasons why the additional treasury bonds issued last year from October were actually only issued earlier this year,” he said.

Certainly, fiscal expansion will not be enough to completely strengthen consumer confidence. Policy must address the reasons consumers don’t spend, Bank of America wrote Wednesday.

“We believe the key is to address an increasingly pervasive problem to save China from economic malaise – the lack of positive incentives at the micro level in both the public and private sectors,” the bank said.

For example, Chinese consumers are staying away from new housing projects even though China has introduced looser mortgage rates and prepayment rules.

Huang explained this by the fact that new construction is simply not completed, which limits new demand – some buyers wait years to receive their purchase. In his opinion, the government should finance unfinished projects more directly.