China's Economic Dilemma: Will Beijing's Stimulus Measures Be Enough?

China Unveils Massive Stimulus Package Amid Economic Slowdown

The market is waiting with bated breath for Beijing's next move on fiscal measures, hoping that they'll...

China's economy is facing significant challenges, including a real estate crash and sluggish growth. Beijing has unveiled a massive stimulus package, but will it be enough to revive the economy?

China's economic stimulus plans for 2024 don't involve a specific large-scale spending package. Instead, the government will focus on growth-friendly policies to boost the economy.

These policies are expected to help China achieve its ambitious goal of 5% economic growth in 2024. While there isn't a fixed amount allocated for this purpose, the government is likely to invest in various sectors such as technology, renewable energy, and infrastructure to drive growth.

Some key areas of focus for China's economic growth in 2024 include:

New Avenues of Growth: Expansion in new and transforming industries like artificial intelligence, digital financial services, and green technologies.

High-Quality Growth: A focus on advanced technologies to drive growth and upgrade traditional sectors.

Global Supply Chains: Maintaining efficient supply chains and access to global markets to support economic growth.

China's economic recovery remains sluggish, nearly two years after the government lifted its stringent zero-COVID lockdowns. The country's economic growth has been tepid, with the first three quarters of 2024 posting a modest 4.8% expansion, narrowly missing Beijing's 5% target.

A combination of challenges has hindered China's growth momentum, including deflation, weak consumer demand, and a severe real estate downturn. Furthermore, ongoing trade tensions with the United States, which are expected to escalate under Donald Trump's second term, have taken a toll on exports. This is particularly concerning, as exports have been a key driver of China's remarkable rise to become the world's second-largest economy.

“China suffers from overproduction and under-consumption,” notes George Magnus, a research associate at the University of Oxford's China Centre and former chief economist at UBS. This diagnosis comes as Chinese leaders acknowledge the economy's loss of momentum. To address this, Beijing has adopted a targeted approach to stimulus.

In September, the Chinese government injected 2.7 trillion yuan ($370 billion) into the banking system to boost lending and cut interest rates. Additionally, new infrastructure spending and aid to indebted property developers were announced. More recently, a further 10 trillion yuan boost was unveiled to alleviate the debt crisis among regional governments, which had borrowed heavily for infrastructure projects.

China's recent measures sparked a significant short-term rally in Chinese stocks, with the CSI 300 index surging 35%. Investors were optimistic, betting that Beijing would announce additional stimulus packages to boost domestic consumption. However, according to Jiayu Li, a senior associate at Global Counsel, “There was speculation that there would be finally demand-side policy to support consumption. So far, none of this has come true.”

Li expressed concerns that China's measures were not enough to stimulate growth. While the announced package was “impressive,” it mainly focused on restructuring existing debts and “cannot be regarded as a new stimulus.” Furthermore, Li pointed out that Beijing underestimated the size of local government debt, estimating it at 14.3 trillion yuan, whereas the International Monetary Fund (IMF) puts the figure at 60 trillion, or 47.6% of gross domestic product (GDP). 

China also faces significant trade headwinds with the US, including a 100% tariff on electric cars. This tariff increase, from 25% to 100%, is part of a broader shift in US trade policy, which also includes tariff increases on lithium-ion batteries and their components, as well as critical raw minerals like natural graphite and semiconductors.

China's latest stimulus package is significantly larger than the one introduced during the 2008/9 financial crisis, which was worth up to 4 trillion yuan. However, when compared to the country's GDP, the current measures account for about 10% of GDP, whereas the previous package represented almost 13%.

The 2008/9 stimulus package helped China maintain a GDP growth rate above 8% during the global economic downturn. Nevertheless, George Magnus, a research associate at the University of Oxford's China Centre, believes the latest measures will have only a “marginal effect” on growth. According to Magnus, these measures will primarily ease the pressure on local and provincial governments to slash budgets. He also warned that Beijing is “just skirting round the edges” and will soon need to take “radical” steps to address the economy's structural issues.

The recent measures may not be enough, particularly considering Donald Trump's plans to impose new US tariffs on Chinese imports when he returns to the White House in January. Trump announced an additional 10% levy on all Chinese goods entering the US, potentially raising the overall tariff to 35%. Economists predict that these new tariffs could hurt China's growth by up to a percentage point.

The market is waiting with bated breath for Beijing's next move on fiscal measures, hoping that they'll hold off until next year when Trump takes office. As Jiayu Li pointed out, “The market is hoping that Beijing is choosing to hold off on more fiscal measures until next year [when Trump takes office).” However, concerns are growing that the impact of any potential stimulus will be limited by then.

East Asia is bracing itself for Trump's tariff threats, which could have far-reaching consequences for the region. Meanwhile, George Magnus believes that the new tariffs “won't have a huge impact” on China's economy, although they may lead to further weakening of the yuan. This could have significant implications for China's economic growth and global trade dynamics.

China's economy is already facing significant headwinds, including deflation, weak consumer demand, and a massive real estate crash. The country's growth rate has been sluggish, with the first three quarters of 2024 posting a modest 4.8% expansion, narrowly missing Beijing's 5% target.

During the initial round of tariffs imposed by Trump in March 2018, Beijing mitigated some of the effects by allowing the yuan to depreciate, making Chinese exports more competitive. As a result, the yuan plummeted by approximately 12% against the US dollar, reaching its lowest point in nearly a decade by August 2019.

The US responded by labeling China a “currency manipulator,” which led to even higher tariffs for several months. Tensions between the two powers eased somewhat after negotiations, but the incident highlights the complexities of the US-China trade dynamic. Meanwhile, experts like Huang Yiping, dean of the National School of Development at Peking University and a member of the People's Bank of China's Monetary Policy Committee, are advocating for more drastic measures. Yiping has called for a substantial stimulus program aimed at “stabilizing and spurring domestic demand.”

In a recent interview with the South China Morning Post, Huang Yiping proposed a bold initiative, calling on Beijing to launch a “Chinese Marshall Plan.” This concept draws inspiration from the post-World War II economic aid program initiated by the US to rebuild Europe. Huang's vision involves leveraging China's surplus industrial capacity to support low-income countries in the Global South in building new infrastructure and transitioning to renewable energies.

However, Huang's proposal is likely to encounter resistance from Western nations, which are already wary of China's expanding influence in Africa, Asia, and Latin America. The initiative may be perceived as an attempt by China to further extend its economic and geopolitical reach, potentially exacerbating existing tensions between China and the West.

China's real estate market is currently experiencing a downturn after years of speculation in property. The question on everyone's mind is: how much more will Beijing inject into the economy to stimulate growth? Analysts concur that substantial amounts are still needed, with projections ranging from an additional 5 trillion to 10 trillion yuan.

Some experts, like Carlos Casanova, senior economist at Union Bancaire Privee (UBP) Asia, believe an even more significant package is required. Casanova told Reuters that a 23 trillion yuan package is necessary to revitalize the economy. Many analysts recommend that future stimulus measures should prioritize social welfare spending for households and provide additional support to the ailing real estate sector, rather than focusing on traditional industrial investment and infrastructure projects.

George Magnus, a research associate at the University of Oxford's China Centre, agrees that the government will “fine-tune” its policies to boost domestic demand. However, he remains skeptical about China's ability to rapidly transition from a production-based, export-driven economy. As Magnus notes, this transformation will require significant structural changes, which may take time to implement.

“I'm not saying that Beijing will be hollow when it comes to further stimulus measures, but I think the government's priority is certainly not to change the development model to become a more consumer-led, welfare- oriented economy,” he told DW.