More of China’s spending power needs to be unleashed. Here’s how

There are signs that the Chinese economy has been improving, owing to the government’s September 2024 stimulus package. Year-on-year gross domestic product growth in the first quarter of this year reached 5.4 per cent – continuing the marked acceleration from last year.

In fact, the change in policy direction has been evident since late 2022, when Chinese policymakers acknowledged that falling demand was becoming a major problem. The most important cause was the real estate market, where a collapsing price bubble hit local government revenues hard, cutting into residents’ property and business income – an important part of disposable income – and pushing consumer spending below trend.

To alleviate the pressure on local governments, the central government allowed them to expand their debt financing by issuing US$1.4 trillion worth of long-term bonds – over five years – to replace their short-term debt. Proceeds from long-term bond issuances were also used to shore up state-owned commercial banks’ balance sheets and enhance their capacity to generate credit.

Meanwhile, the central bank has maintained faster credit growth, but is being cautious about lowering policy rates. With China’s real interest rates above 4 per cent, a significant rate cut is unavoidable given concerns about exchange-rate volatility and commercial banks’ financial condition.

Chinese authorities understood that stabilising the property and stock markets could mitigate the slowdown in consumer spending. Thus, the stabilisation strategy requires local governments to use a portion of the special debt financing they receive to purchase unsold residential buildings on the market, and to use those units as guaranteed housing for local residents.

It also requires state-owned nonbank financial institutions to buy back and hold more shares. In another country, such measures would sound implausible. But China’s state-owned financial system makes them feasible.

  

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