Looking at: China’s Recent Stimulus

Estimated reading time: 3 minutes

Hoist the House

China made big moves this week in an effort to stimulate its struggling economy. Some of the measures policy makers included allowing consumers to refinance at lower mortgage rates, a new Rmb500 billion ($71 billion) asset swap facility to support the domestic stock market, a Rmb300 billion ($43 billion) program for corporate buybacks, as well as the announcement that the People’s Bank of China (PBoC) is considering a National Stabilization Fund.

All of these efforts are intended to stimulate economic activity, support equity prices, and attempt to give the economy enough of a boost to exit a deflationary spiral that’s been gripping businesses and the property market since fall 2022.

Here’s one of the problems they’re hoping a stimulus package will fix. China’s Producer Price Index (PPI), which is a better illustration of the inflation businesses experience and is seen as a representation of underlying economic demand, has been in deflation (i.e., negative growth rates) since October 2022.

An economy in deflation almost always experiences falling GDP growth and a reduction in consumption. Also included in the chart above is a line for Chinese retail sales, which have fallen to a range of 2-4% growth y/y, down from a pre-pandemic range of 7-9%.

In the U.S., a drop of that magnitude in consumer demand would be more of a headwind given our economy’s 68% dependence on consumption. In China, household consumption only amounts to 39% of GDP, with government and business investment (total investment below) amounting to roughly 42%, compared to 22% in the U.S.

Given the larger dependence on investment in China, the recent stimulus package was more targeted towards boosting business activity rather than consumer activity (as is more often the case in the U.S.).

But was it enough?

Trend is Not Their Friend

Although the numbers sound big and the efforts seem wide-reaching, this stimulus announcement alone may not be enough to bring the entire Chinese economy out of the doldrums.

The Chinese housing market in particular has driven the negative and battered sentiment around the country. The housing supply glut remains the main driver of falling property prices, and Goldman Sachs estimates the cost for lowering excess housing inventory (i.e. stop the bleeding in home prices) in all cities to be nearly Rmb8 trillion ($1 trillion). They also estimate that the funding currently approved or available only amounts to a little over half that. It’s difficult to see the economy rising above the ashes without further repair of the housing market.

Broadening things out to the full economy though, and tying it together with the Chinese equity market, we can see why this stimulus focuses both on boosting business activity and supporting equity prices. The correlation between GDP (shown below as the GDP deflator, which measures the price changes of goods and services) and the stock market is quite high. With China’s GDP deflator in negative territory, the stock market has followed suit.

As further illustration of this relationship, we looked at Japan over a longer-term period. The Japanese equity market was in decline as long as the country’s GDP deflator remained negative. The policies of Shinzo Abe that began in 2012 (dubbed “Abenomics”) helped the GDP deflator return to positive territory and in turn, drove Japanese equities to show signs of life.

It’s clear that China needed a stimulus package that could touch various pain points in its economy, but at this juncture, the package announced may not be large enough to solve enough of these problems.

Chinese markets reacted very positively to the announcement, and rightfully so as it was an indication that policy makers are willing and ready to support the economy and markets. But unless more stimulus is announced, and a more convincing recovery in the housing market, consumption, and inflation readings are achieved, this is likely only a partial and short-term solution.

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