There may be still newer policies to come, but the measures already taken and recently promised by the Politburo fall short of China’s economic needs.
Commentary
Financial markets applauded the Politburo’s recent words of commitment to China’s economic recovery. Chinese stocks rallied on the news, as did oil prices, presumably because a pickup in the pace of growth in China would increase oil demand. But all seems destined for disappointment.
Though future policy actions by Beijing might ultimately come up to the mark, what the authorities have done so far and what the Politburo appears to be promising fall far short of China’s needs.
Strangely, almost all the enthusiasm about the Politburo’s announcement seems to revolve around a single word. The authorities have promised “moderate” monetary ease, a change from the earlier use of the word “prudent” and presumably a sign of more forceful action to come. Beijing has not used the word “moderate” since 2008, the year of the global financial crisis.
Although at the same time the Politburo promised a “proactive fiscal policy,” it offered little detail. Considering that several stimulative measures of recent months have largely failed to get the economy moving sufficiently, it is hard for any reasonable observer to get too optimistic over these most recent, moderate, and hard-to-assess promises.
The depths of China’s economic problems become especially clear in the record of past policy failures. Over the last 12 months, the People’s Bank of China (PBOC) has cut the prime lending rate by half a percentage point from 3.6 percent to 3.1 percent. In an effort to ease the downward pressure on real estate values, Beijing budgeted some 250 billion yuan to buy up vacant apartments and encourage state-owned banks to lend more freely to troubled property developers.
To bolster asset prices, it has set up a lavish 300 billion yuan swap program for the PBOC so that firms can more easily buy back stocks. Beijing has also implemented a 200 billion yuan program for households and businesses to trade in appliances and industrial equipment, presumably encouraging more new purchases.
More recently, Beijing has launched a 1.4 trillion yuan effort to swap central government bond obligations for those of local governments as a way to delay the date when local governments must pay and marginally reduce the interest burden of these obligations.
These measures have failed so far to remedy China’s economic problems, which speaks to how severe those problems are and how any future remedies will have to go well beyond anything described as “moderate.” The fact is that China’s economy presently suffers from a long series of mistakes and now needs great help.
The problems began when Beijing failed to act quickly in 2021 when it became clear that its earlier and sudden decision to remove support for property development had led to the failure of major developers. The long delay in government help after these failures started allowed the developers’ financial weakness to seep through Chinese finance and hamstring its general ability to support growth.
If these domestic economic and financial woes were not enough, China increasingly faces a hostile trade environment with the United States, Europe, Japan, and even the developing nations of the so-called Global South in Latin America and the rest of Asia. Some have already hiked tariffs and put other restrictions on inflows of Chinese products. And with the recent presidential election in the United States, it is clear that this kind of tariff pressure will only intensify in the coming year.
Against this array of difficulties, it is hardly a surprise that recent past measures have had so little effect to date. It should also be apparent that the needs of the day require still bolder action on Beijing’s part. In this regard, the Politburo’s emphasis on monetary policy—moderate, prudent, or otherwise—seems remarkably misplaced.
Consider that the measured interest rate cuts so far have already fallen behind reality. When the PBOC began to cut rates back in 2022, Chinese inflation averaged 2–3 percent a year. The then prevailing interest rate on prime loans of 3.85 percent implicitly demanded that borrowers repay at a real rate of 1.3–1.4 percent a year (the nominal cost of the loan less the fall in the purchasing power of the money repaid after a year.) Though nominal interest rates have dropped to 3.1 percent, inflation in China has slowed to just over zero. That means that the real cost of borrowing has risen since 2022 and presently stands almost 2 percentage points higher than two years ago.
In other words, for all the interest rate declines, monetary policy has actually tightened, not eased. The PBOC would have to cut interest rates by another 1.75 percentage points just to bring real borrowing costs back to where they were in 2022. Then, to add significant stimulus, monetary policy would have to go further. That hardly seems likely under the notion of “moderate” ease.
Even in the unlikely event that the PBOC and its bosses in Zhongnanhai were to make such bold moves, it is not apparent that it would be sufficient to put China’s economy back on track. Certainly, monetary easing in China cannot change the hostility to China trade that is becoming nearly universal in the rest of the world. As should be clear from the history of China’s economic problems, they now have more to do with a lack of household and business confidence in the future than they do about the cost of borrowing.
When people and businesses lack confidence, they remain reluctant to extend themselves even when real borrowing costs are attractive. Restoring that confidence will take major policy shifts from Beijing and a long time to develop, even under the most imaginative and well-crafted policies. What the Politburo has offered seems to offer neither. The Politburo’s statements offer cause for hope, perhaps, but not for enthusiasm.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
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