HKEJ Column

Just as the global economy remains sluggish and the Chinese economy is facing challenges, the People’s Bank of China (PBoC) announced a series of monetary easing measures on 24 September 2024. Their objectives are to stimulate the overall economy, prevent deflation, and proactively address mushrooming challenges in the international market. Specifically, the main initiatives include reducing banks’ reserve requirement ratio, policy interest rates, and interest rates for existing mortgages. Additionally, two policy tools are targeted to support the stock market. One is a swap programme that allows non-bank financial institutions and insurance fund brokers to obtain liquidity from the central bank for stock purchases. The other tool is a special re-lending facility created to help listed companies to secure buybacks and increase their shareholdings.

Evidently, apart from further stimulating investment and consumption, the package primarily aims to inject colossal liquidity into the Mainland market. This will help to break investors’ expectations of a prolonged stock market downturn and to induce economic boom by revitalizing the capital market. Pan Gongsheng, Governor of the PBoC, has disclosed that more monetary easing measures will be introduced.

Nevertheless, in stark contrast to the sluggish economy, the recent stock market boom inevitably causes thrilled investors and entrepreneurs to sober up and contemplate the following questions: What are the impacts of the policies? Will there be a spillover effect beyond the financial market on the real economy, boosting consumption and enhancing investor confidence? Is the current bull market simply a flash in the pan triggered by policy intervention, or does it truly reflect a full recovery of market confidence in policy and economic growth? Will the new measures serve as a phase-in strategy to facilitate long-term development of the national economy?

Monetary policy pivot

First of all, we should realize that the soaring stock market driven by this round of monetary easing measures still offers no viable solution to the predicament of the real economy. As shown by the National Bureau of Statistics data released on 27 September 2024, the total profits of industrial enterprises above the designated size in August declined by about 17% year-on-year, back to the lowest level since May 2023. Since a brief rally at the beginning of 2024, the Consumer Confidence Index has continued to trend downwards, hitting a level slightly lower than during the peak of the COVID-19 pandemic in early 2022. Even the pumped-up stock market reflects investors’ doubts about the sustainability of the “profit-making effect”, as evidenced by the massive buying and selling and ongoing shock therapy for the market following the National Day holidays.

The stock market can be an economic barometer. Generally speaking, despite the market’s instantaneous reactions, short-term fluctuations cannot accurately reflect the economic situation. However, it is undeniable that, over time, the stock market’s long-term performance can illustrate changes in economic fundamentals. Hence, its stable development cannot do without a solid economic entity, or the market will merely be a castle in the air. Understanding this fundamental logic of the interaction between the stock market and the real economy is conducive to strategizing for future economic development.

Laying a sound economic foundation to consolidate the fundamentals is critical to fostering national economic growth. This is the only way to facilitate mutual prospects between the economy and the stock market, thereby rolling out a roadmap for a steadfast path forward. Amidst the constraints in international trade, the promotion of economic development can be broadly approached by boosting both investment and consumption. As a long-standing powerhouse of manufacturing, China has historically advocated for investment expansion through its stimulus policies to safeguard employment and people’s livelihoods. However, given the present surplus in production capacity, persistently weak consumption has long been a critical bottleneck to economic growth. Hence, it is necessary to shift the focus from “investment over consumption” to substantially enhancing consumption, thereby expanding investment through demand, with economic growth as the ultimate goal. The question is, how can the impact of monetary and fiscal policies be extended beyond the financial market to permeate the consumption market?

The key to policy outcome

In the wake of the coronavirus pandemic, the Central Government has introduced an array of consumption-stimulating policy measures to step up domestic demand. Over the past year these efforts have further intensified, ranging from abolition of taxes and tariffs, subsidies on vehicle purchases, to removal of property purchase restrictions and lowering of mortgage rates. Despite these initiatives, consumption has to recover as expected. The underlying reason is probably that the measures are not strong enough to stimulate consumption, or that it is too challenging to fundamentally boost consumer confidence and dispel their worries about the future.

Take the recent National Day “golden week” holidays, for example, when Shanghai, Sichuan, and Guangdong handed out consumption vouchers to stimulate growth. Nonetheless, due to the first-come-first-served basis and the preset consumption threshold levels, many consumers―particularly the low-income and the elderly―have been unable to benefit from the official largesse, thus greatly compromising the expected effect. In addition, lowering mortgage rates for first-home purchases and existing properties may lower mortgage payments and raise people’s disposable incomes. That being said, whether the consumption potential thus released can be translated into actual demand largely depends on consumer expectations and their confidence in the economic future. In the face of the slowdown in the national economy and spiralling unemployment rates, even if the new measures launched by the authorities can help to decrease consumers’ expenditures to release consumption potential, this might merely end up as additional bank deposits for consumers.

Economic growth hinges on public well-being

The effective approach to boosting consumption is to start with beefing up consumer confidence and willingness, elevating the consumption market from a relatively static state  to a fairly active environment. Following the monetary policy announced on 24 September, the fiscal policy for countercyclical adjustment proposed on 12 October not only indicates active support for debt resolution and stabilization of the real estate market but also emphasizes the urgent need to protect people’s livelihoods and promote domestic demand. Compared with past consumption stimulus packages, economic recovery through domestic demand calls for stronger policy initiatives and a twofold strategy encompassing short-term stimulus and long-term confidence boost.

First, short-term stimulus acts as a consumption-inducing pacemaker. A rise in short-term demand is conducive to increasing corporate productivity and business revenue, and to a certain extent, safeguarding employment and raising labour income. During the recent National Day holidays, despite the limited effect of consumption vouchers burdened by the complexities of execution, consumers generally showed a significantly greater willingness to spend. As such, it is necessary for the upcoming short-term stimulus to further expand the coverage of the consumption vouchers and to scrap the consumption thresholds and limits on product categories. This will help to drum up all types of consumption expenses stimulated through the vouchers.

On the other hand, a wide-ranging debate should take place to determine whether it is necessary to replace the consumption vouchers with direct cash subsidies. In my opinion, while both can bring about a crowding out effect, cash handouts could cause consumers to save the money in the bank rather than spend it. This would of course offset the consumption stimulus effect. For certain consumption groups, e.g. the student group included in the aforementioned fiscal policy, differentiated subsidies can maximize the release of effective demand. While specific measures remain to be introduced, it is worth keeping an eye out for follow-up arrangements.

Second, to achieve a comprehensive solution to stagnant consumption and sustain soaring domestic demand, it is pivotal to fundamentally dispel consumers’ worries about the future, so they are not only willing but also emboldened to spend. This psychological bedrock depends on efforts to strengthen consumers’ confidence in future economic development and employment prospects, as well as on establishing a more reliable social security system. The new fiscal policy also indicates a greater financial effort to protect people’s livelihoods and employees’ wages, in addition to maintaining government operations, ultimately giving the general public peace of mind. In the long run, further improvement should be made to basic social security systems, such as health insurance and old age pensions, along with wider coverage of unemployment protection and better minimum livelihood protection nationwide. Only by providing consumers with the greatest sense of security from the most basic level of the systems can consumption demand be fully unleashed.

The curtain has now been raised on a powerful economic impetus. While applauding and celebrating the long-awaited stock market revival, investors must take special care to stay calm. It is by grasping the core driving efforts behind the current economic momentum that we can seize this opportunity to break free from the doldrums and to chart a new course for national growth.

Dr. Jing LI
Senior Lecturer in Economics
BBA (IBGM) Deputy Programme Director and Admissions Tutor