Dragon's Gambit
Following on from our “China Goes Big, But is it Big Enough?” daily earlier this week, China’s Politburo has today pledged fiscal spending and meaningful rate cuts to reinvigorate growth.
The Politburo's latest meeting, which unusually focused on the economy outside its regular schedule, pledged to stabilise the struggling property sector, boost fiscal spending, and implement forceful monetary policy adjustments. These measures include strictly limiting new housing projects, accelerating the issuance of special bonds, and providing aid to job seekers and lower-income groups.
The government's decisive action has already bolstered market sentiment, with stock indices rising sharply. Moreover, the renminbi has strengthened, currently trading around the psychological 7 level against the dollar.
In a significant move, Beijing announced it is contemplating injecting up to CNY 1tn (USD 142bn) into its largest state-owned banks. This capital infusion, primarily funded through special sovereign bond issuances, aims to enhance the banks' ability to support the struggling economy. It marks the first such intervention since the 2008 global financial crisis, underscoring that top policymakers are ready to act given the current economic challenges.
Concurrently, the government is rolling out targeted measures to boost consumption. In an unusual step, one-off cash handouts are being distributed to residents facing hardship ahead of the Golden Week holiday. This direct approach to fiscal stimulus is coupled with extended social security benefits for unemployed college graduates, addressing mounting concerns over youth unemployment.
Local initiatives are complementing these national efforts. Shanghai, for instance, has announced the distribution of over CNY 500m in consumption vouchers, encouraging spending across various sectors including dining, hospitality, and entertainment.
Monetary stimulation alone will not resolve the circular deflationary issue but coupled with a forceful fiscal package and stronger positive actions in the property market, the chances of getting consumers to spend more increases markedly.
Despite challenges such as record-low profit margins in the banking sector and a protracted property market slump, Chinese officials are still confident in the nation's economic resilience. This week, China has demonstrated its vast arsenal of tools, ranging from monetary easing to direct cash handouts, in a bid to bolster sentiment and spur economic activity. The rapid deployment of diverse stimulus measures highlights the government's commitment to stabilising growth and boosting public confidence. While these recent actions have reduced concerns about China missing its 5% annual growth target, economists are still cautiously optimistic.
With its vast economic reserves and policy flexibility, China continues to prove that it has sufficient firepower in its toolbox to deploy when necessary, reinforcing its ability to navigate through economic headwinds.
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