China’s economy gets stimulus

China has at last started giving stimulus to its flagging economy. Will it work?

But the economy needs more

China’s government announced belated economic stimulus measures on 23rd September 2024. Chinese central bank People’s Bank of China (PBOC) cut down its benchmark interest rate by 0.2 % to 1.5% from 1.7%. This followed the cutting down of benchmark interest rate by US Federal Reserve by 50 basis points in the previous week. One basis point is .01%.

The cutting down of interest rates may make interest-sensitive consumption and investment cheaper. This is expected to give some boost to consumption & investment. Chinese economy is currently struggling with slowing down of both investment and consumption. Retail sales continue to rise at a sluggish pace. In July 2024 retail sales in China increased y-o-y by just 2.4% after rising by just 2% in the previous month.

Cutting down of interest rate may give some boost to the real estate sector too. The real estate sector there is in severe crisis. Lower interest rate will lower the cost of borrowing for both home buyers and real estate developers. Some other measures have been announced for giving a stimulus to the real estate sector.

Interest rates on existing mortgage loans have been lowered by 0.5%. This measure will make home loans less expensive. Chinese government expects that this measure will result in households realizing $2 billion in annual savings. It expects that these savings will turn into more consumption which in turn will give a boost to economic growth.

To give a further boost to the real estate sector, the minimum down payment required for second-time home buyers has been reduced from 25% of the property value to 15%.

Further, cash reserve ratio (CRR) requirements of Chinese banks have been reduced by 0.5%. PBOC expects that this reduction in CRR will result in the creation of $142 billion worth of additional loans by Chinese banks. This increased credit in the economy may give some boost to both private investment and consumption.

The Chinese economy currently is in a deep crisis. It needs more measures for a full stimulus. Confidence of foreign investors is shaken. Government control & intervention in the economy has increased significantly. In August, the unemployment rate among its 18-24 years age group shot up to 18.8%. This is the official figure. The actual unemployment rate at the ground level may be even higher. The country has got an edge in the production of Electric Vehicles. But its trading partners, such as European countries, are imposing increased tariffs on its EV imports. This is being done to offset the subsidies that the Chinese government gives to its domestic EV makers.

In this scenario, the Chinese government and central bank need to give much more stimulus. The Chinese state should relax its hold on the Chinese economy and take immediate measures to restore the confidence of foreign investors.