China’s recent monetary easing measures are useful, but not enough
On September 24, 2024, the People’s Bank of China (PBOC) announced a slew of monetary policy decisions, including a sizable policy rate cut and other supportive financial measures. Two days later, the Politburo of the Chinese Communist Party met and “vowed to save the private economy, stabilize its property sector from further slumping and ensure necessary fiscal expenditures.” These moves are a bold and significant political and policy decision. However, the announced monetary and financial measures—while useful—are not enough to revitalize China’s lackluster economic prospects. They need to be matched by forceful fiscal actions, as promised in the Politburo’s statement.
Japan’s experience during its lost decades proves a useful example. In response to the country’s economic crisis, only significant fiscal support managed to sustain Japan’s economy when it was burdened with a balance sheet recession triggered by a collapsing property sector, plummeting stock markets, increased savings rates, and decreased consumption. This is a lesson China should pay attention to.
Monetary easing policies
The recent monetary easing package impacts all key aspects of monetary policymaking in China. The list of announced measures is as follows:
- Cut the benchmark seven-day reverse repo rate—considered the most important PBOC policy rate to manage liquidity conditions and influence other lending rates—from 1.7 percent to 1.5 percent. Reducing the rate by twenty basis points, instead of by the usual ten basis points, is a significant change.
- Reduce the existing mortgage rates by fifty basis points, on average, and lower interest payments by homeowners by 150 billion yuan ($21.4 billion). This measure, it should be noted, is of limited helpfulness because the net transfer to the household sector will be offset by planned reductions in bank deposit rates.
- Lower banks’ required reserves ratios by fifty basis points to achieve 6.6 percent on average for the banking sector. This step will allow commercial banks to reduce the amount of cash they must keep at the PBOC, which earns a low rate of return.
- Reduce the down payment ratio on second home purchases from 35 percent to 15 percent—similar to the move for first home purchases announced in May.
- Enhance support for a 300 billion yuan ($42.5 billion) fund set up in May to lend to local governments money to buy unsold homes and convert them to publicly subsidized housing units. Support can include increasing the share of such loans from 60 percent to 100 percent of the price of each unsold home.
- Establish a 500 billion yuan ($70.5 billion) structural monetary policy facility to provide liquidity to securities firms, asset management, and insurance companies when purchasing stocks by a swap line pledging their assets for high quality assets.
- Establish a 300 billion yuan ($42.5 billion) facility with an interest rate of 1.75 percent to encourage banks to support listed companies’ share buybacks.
The announcement of these measures has helped improve market sentiment, especially by raising expectations of additional fiscal measures to come. Chinese equity markets and the exchange value of the Chinese yuan have risen since the policies were made public, with positive spillover effects on international financial markets. Chinese equities have risen by more than 20 percent since the announcements—technically entering a bull market. However, while helpful at this moment, these measures will not be enough to maintain improvements to China’s lackluster economic growth going forward.
The need for forceful fiscal interventions
China’s household sector has experienced a balance sheet slowdown milder than Japan’s balance sheet recession, but with similar underlying dynamics. The slowdown has been triggered by the property slump and sustained falls in stock markets, which destroyed a sizable portion of China’s household wealth and undermined consumer confidence. Specifically, the prices of existing homes in China’s large cities are down nearly 30 percent from 2021 levels according to the Japanese investment bank Nomura. Chinese stocks have lost six trillion dollars in value in the past three years—or more than 45 percent as compared to 2021 levels. Even factoring in the 20 percent rebound triggered by the recent policy announcements, Chinese equities are still more than 30 percent lower than in 2021. In response, Chinese households are visibly curbing personal spending. According to the PBOC’s Urban Depositors Survey Report, 61.5 percent of respondents wanted to increase their bank deposits in the second quarter of 2024, a big jump relative to 2021. Chinese households’ bank deposits rose to $40.9 trillion (or more than twice the country’s GDP) in July 2024, increasing by more than $2 trillion from the previous July.
Consequently, Chinese household consumption growth has slowed since 2021. It is only expected to grow by 3 to 4 percent in real terms per year in the next five to ten years (compared to the 10 percent growth rate prior to 2018)—contributing around an underwhelming 1.5 percentage points to annual real gross domestic product (GDP) growth. The trend could curtail overall GDP growth to 3 percent per year, after accounting for expected headwinds of strong growth in investment and net exports.
As demonstrated by Japan’s experiences during its own lost decades, it takes forceful fiscal actions involving large deficit spending to sustain and stimulate economic growth. Doing so will compensate for slowing personal consumption until households can repair their balance sheets. This process has been shown by Japan to be slow and lengthy. It takes time for property and stock prices to recover their losses, during which period households would prefer to save. Households will be less tempted by lower interest rates to borrow and consume more—weakening the effect of monetary easing.
In an effort to avoid falling into a balance sheet recession, the Chinese political leadership has promised more fiscal spending to support the economy. It needs to promptly deliver on these promises, implementing concrete and significant fiscal measures. For example, it should invest in new digital and green infrastructures, which promise higher returns compared to traditional infrastructure like bridges and roads. In short, China needs to go beyond the limited steps taken so far—such as the plan to issue two trillion yuan ($284 billion) of government bonds or a rare one-off cash handout to those living in extreme poverty.
With one quarter left in 2024, China needs to move expeditiously and forcefully if it hopes to meet its growth target of around 5 percent this year. International economists, such as those from Goldman Sachs and Citigroup, have just downgraded their full-year estimates for China’s GDP growth to 4.7 percent. Beyond this year, the economic prospects for China remain as challenging as ever. Even slower growth is expected in 2025 by many international economists. More significantly, with its long-term government bond yields poised to fall below those of Japan, China faces a growing risk of “Japanification” with decades of slow growth ahead unless it can match its softer monetary stance with proper fiscal intervention.
Hung Tran is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center, a former executive managing director at the Institute of International Finance, and a former deputy director at the International Monetary Fund.
At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.
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