China’s Stimulus: The First Steps Toward Economic Revitalization
As the world's second-largest economy, China faces immense expectations to deliver robust growth in the post-pandemic era. Amid signs of economic headwinds, Beijing has rolled out a dual-pronged fiscal and monetary stimulus package, which marks a promising starting point in what is expected to be a broader, more concerted effort to restore China’s growth momentum.
China is taking bold steps to reignite its economy with a combination of fiscal and monetary measures, signaling the beginning of a broader policy overhaul aimed at restoring confidence and growth. After months of economic pressure, including deflationary concerns and weakening domestic demand, the government’s recent policies reflect a promising opening to stabilize the economy in both the short and long term.
Monetary Policy: Infusion of Liquidity and Mortgage Adjustments
The People's Bank of China (PBoC) has moved swiftly, reducing key interest rates and cutting the reserve requirement ratio (RRR), freeing up over 1 trillion yuan ($142 billion) of liquidity in the banking system. This liquidity boost, combined with a new policy to lower mortgage rates by 30 basis points for both first and second homes, signals an aggressive push to reduce the financial burden on homeowners, bolster the real estate sector, and stimulate consumer spending.
These adjustments in mortgage rates, set to take effect from October 25, 2024, are part of a broader strategy to revitalize China’s vital housing market, which has been hit hard by falling demand and low consumer confidence.
Fiscal Stimulus: Sovereign Bonds and Strategic Spending
On the fiscal front, China plans to issue 2 trillion yuan ($284 billion) in special sovereign bonds aimed at boosting infrastructure, consumption, and technological innovation. These bonds are a critical component of the fiscal stimulus designed to support sectors struggling to regain momentum post-pandemic. According to Capital Economics, the fiscal stimulus could lift GDP by 0.4%, helping China meet its 5% growth target.
A key area for growth is China's services trade, which saw rapid expansion in the first eight months of 2024, totaling nearly 4.89 trillion yuan—a 14.3% year-on-year increase. Notably, travel-related services saw significant growth, signaling a rebound in domestic and international tourism.
New Energy: A Market on the Rise
China's new energy vehicle (NEV) market is also surging, with retail sales of new energy passenger vehicles reaching 1.12 million units in September 2024, marking a 50.9% year-on-year growth. This growth reflects the country’s commitment to transitioning towards a greener economy while also providing a much-needed boost to consumer demand.
Strengthening Regional Ties
China is also making strides in international cooperation, as evidenced by the recent agreements signed with Vietnam. These agreements cover areas such as agriculture, cross-border QR payments, and railway projects, which aim to strengthen economic and infrastructure ties between the two countries. This move is expected to enhance China’s position in regional trade, further bolstering economic growth.
Outlook: A Promising Start to Broader Economic Reforms
These initial fiscal and monetary measures form the cornerstone of China’s broader strategy to tackle its economic challenges. With deflationary pressures persisting, the combination of domestic policy adjustments and international cooperation efforts presents an optimistic outlook for the near term. The increase in new energy vehicle sales, rising services trade, and strategic fiscal spending are already contributing to a stronger economic foundation.
While further reforms will be necessary to address deeper structural issues, these steps represent a robust start in China’s mission to achieve its 2024 growth target and beyond. The current policies not only offer short-term relief but also set the stage for a more sustainable and balanced recovery trajectory.
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Further Reading and Sources of Data:
China's Deflation Issues Deepen as Consumer and Producer Prices Fall
https://cutt.ly/oeAShjDz
China's Services Trade Growth and Recent Economic Policies
https://cutt.ly/ueAShjxO
China Economic Review: Sovereign Bond Issuance
https://cutt.ly/HeAShjkk
CEO Insights Asia: China's 2024 Fiscal and Monetary Stimulus
https://cutt.ly/neAShj7V
reuters, bloomber, China's National Bureau of Statistics, publications from PBoC
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October 13th @bdg
Lo Khong Guan
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