Chinese Stimulus Package: Is it Too Little, Too Late?

The People’s Bank of China (PBOC) announced its largest stimulus package since the pandemic on September 24, 2024, in an attempt to relieve deflationary pressures and put the Chinese economy back on track to achieving the government’s official growth target of 5%. While some economists believe that the stimulus package comes too late to impact the economy in 2024, others expect it to drive economic growth in 2025.

Will the Stimulus Package Help?

Given the significantly weak credit demand in China, from both businesses and individual consumers, there are concerns regarding the effectiveness of the PBOC’s liquidity injection. Also, China lacks policies that can support sustained economic activity, which means the stimulus package alone might not be enough.

PBOC Governor Pan Gongsheng also announced that the central bank intends to cut the cash reserves banks must hold in the near future or the reserve requirement ratio (RRR) by 50 bps, which would make about 1 trillion yuan ($1.42 billion) available for new lending. Based on liquidity conditions, the RRR could be further cut by 0.25-0.5 percentage points later in the year. The PBOC also intends to lower the 7-day reverse repo rate by 0.2 percentage points.

While these measures come too late to make a meaningful difference in 2024, the stimulus package, along with other fiscal policy support, could help the Chinese economy grow in Q4 2024 and 2025. Some experts have gone so far as to say that the package comes too late and should have been launched a year ago while others say it's better late than never.

Concerns regarding the impact of the PBOC’s initiatives come against the backdrop of China’s economic data for August missing expectations. Although local governments in the Asian nation have been accelerating bond issuance to support infrastructure projects, some experts believe more is required to make a significant difference. Several investment banks, including UBS, Goldman Sachs and Bank of America, have lowered their 2024 growth forecasts for China.

Impact of the Stimulus Package on the Financial Markets

The markets reacted positively to the PBOC's announcement, indicating that the stimulus package is expected to ease concerns regarding the Chinese government's ability and willingness to take bold steps to bolster the economy. The stock markets, in particular, appear more confident that the Chinese economy could witness a turnaround and achieve stronger growth in Q4 2024 and 2025.

While Chinese stocks and bonds rallied after the stimulus package was announced, Asian stocks hit a 2.5-year high on the news that borrowing costs would be lowered and more liquidity would be injected into the Chinese economy. The Chinese yuan soared to a 16-month high against the US dollar. Market sentiment for Chinese stocks continues to be bullish, as can be seen from the CN50 sentiment on Acuity’s AssetIQ widget.

A rebound in China’s economy is likely to benefit Australia and South Korea, especially if it involves even a partial recovery in the Chinese real estate sector. This will fuel demand for raw materials and iron ore from Australia. South Korea, on the other hand, is a key supplier for China’s local and global value chains.

Therefore, economic recovery in China could spur industrial exports from South Korea. The positive outlook on Australian stocks can be seen in the bullish sentiment for the ASX 200 index on Acuity’s AssetIQ widget.

An economic recovery would also drive higher spending by Chinese consumers. This would benefit countries that export luxury goods and popular tourist destinations, such as Italy and France. These countries could benefit especially during the Chinese New Year, coming up in late January 2025.

China's stimulus package of 2008 majorly benefited Japan, since several Japanese companies are key suppliers for Chinese manufacturers. Japan is also a popular tourist destination for Chinese travellers. However, the current stimulus package failed to evoke visible gains in the Tokyo stock market.

This could have been due to concerns regarding the economic policies outlined by Ishiba Shigeru, the new Japanese Prime Minister. However, market sentiment on the Nikkie 225 index is currently very bullish, as revealed by Acuity's AssetIQ widget.

Among the emerging economies, Southeast Asian nations like Malaysia and Thailand, along with major producers of commodities, such as Argentina and Chile, are likely to benefit from any increase in demand for commodities and industrial raw materials from China.

However, for now, the world will need to wait and watch whether the optimism elicited by the stimulus package translates into real gains, such as increased investments by private and state-owned enterprises, higher consumer confidence and a recovery in foreign direct investment over the coming months.

It is also important to remember that the ripple effect on the global economy would be more significant if it is driven by stronger economic fundamentals in China rather than by an increase in nominal prices.