In the final week of September, China’s political leadership took its boldest economic step in years, unveiling a broader-than-expected suite of policies to try to restore confidence in the world’s second-largest economy.  

Although domestic markets rallied initially, by October 8, they reversed course, as doubts grew about the robustness of the government’s economic rescue plans. It also remains uncertain whether Beijing will be able to address the more deep-seated and structural issues plaguing the Chinese economy. 

Property developers will get a boost. Beijing’s massive stimulus immediately lifted domestic markets to their highest level in years, while U.S.-listed stocks of Chinese firms surged as well. Some investors bet that China’s leaders were finally willing to shift their approach in response to experts’ calls to halt the deflationary spiral that has been responsible, in part, for depressing consumer spending. Some of China’s battered property developers saw their stocks surge on September 30, as investor sentiment was buoyed by not only the slew of new national support measures, but also by announcements from the municipal governments of China’s four largest cities that they would remove restrictions on home-buying and lower down payments. Similar easing measures introduced in smaller cities earlier this year, however, have not yet produced the intended results, with the value of residential properties falling 25 per cent year-on-year in the first eight months of 2024. 

Half-measures may not be enough. Many analysts also note, however, that Xi’s flurry of new stimuli was not as aggressive as what China introduced during the 2008 global financial crisis. Missing from this latest package are, for example, more decisive fiscal moves that would sustain the initial momentum. Furthermore, tackling the country’s more embedded, structural issues would require a fundamental rebalancing of the Chinese economy to focus more on domestic consumption. As one example that more needs to be done, the 7.9 per cent uptick in domestic tourist spending during this year’s National Day ‘Golden Week’ was modest compared to 2019 levels. 

The optimism immediately after the stimulus measures were introduced began waning within a week. Xi’s National Day speech, given on September 30, gave no indication that there would be a more dramatic policy break and instead sounded a more ideological note. A much-anticipated press conference by the National Development and Reform Commission, China’s top state planner, only elaborated on support for investment projects and did not mention any new measures.  

If demand-side measures continue to fall short, national income will still flow disproportionally into domestic production rather than consumption, maxing out the return on this recent investment as industries produce more outputs but in less efficient ways, continuing to fuel concerns in the West about manufacturing overcapacity. Chinese economists are counting on the Politburo committing to concrete solutions, such as scaling up bond issuance, increasing targeted cash transfers, and financing projects that can create jobs, all in hopes of giving its cost-conscious and debt-averse consumers the means and confidence to spend. 

While China’s electric vehicle producers saw their sales and stocks boosted by the stimulus package, the impact has been weaker on some other industries that are under scrutiny over concerns about overproduction.  

Steel, for example, is in a more precarious situation, as it depends heavily on demand in the country’s real estate sector, for which inventories of unsold and unfinished properties remain high. As scrutiny of Chinese overcapacity continues in Canada and elsewhere in the world, China will need to break with its overreliance on exports and focus on increasing domestic consumption. 
 

• Edited by: Vina Nadjibulla, Vice-President Research & Strategy and Ted Fraser, Senior Editor.