MC Explains: China's response to slowdown may not be a ‘wall of money’ but modest measures

While China’s zero-Covid policy sheltered economic activity in 2021, highly infectious variants of the novel coronavirus dragged economic output last year.

Growth slowed to 3 percent on-year in 2022 from 8.4 percent. The official target for this year is around 5 percent.

The property market crunch, contracting private investment and a cloudy global outlook threaten growth prospects amid extended rate hike cycles in the West that dent demand for Chinese products.

Over the medium term, China’s economy continues to confront a structural slowdown, according to the World Bank, with potential growth declining because of adverse demographics, tepid productivity growth, and higher constraints to a debt-fuelled, investment-driven growth model.

The International Monetary Fund on July 25 maintained China’s growth forecasts at 5.2 percent and 4.5 percent for 2023 and 2024, respectively.

The IMF said there was a change in the composition of Chinese growth with consumption growth evolving broadly as expected in April but investment underperforming due to the ongoing real estate downturn.

In the second quarter of this year, China’s GDP grew at a slower-than-expected 6.3 percent on-year. Growth also eased on a quarterly basis, to less than one percent. Monthly data are suggesting a further moderation of the recovery momentum.

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What can policymakers do?

The Chinese Politburo’s quarterly meeting in late July struck a dovish tone, raising expectations of policy changes over the coming months.

“China’s leadership is clearly concerned. At the previous Politburo meeting dedicated to the economy back in April, they noted that the recovery was proceeding better than expected. Now they are calling it tortuous, with the meeting readout quickly turning to the numerous challenges facing the economy, including insufficient domestic demand, financial difficulties in some sectors and a grim external environment,” Julian Evans-Pritchard, Head of China Economics at Capital Economics said in a note on July 24.

So far, the focus has been on boosting domestic demand through monetary and fiscal measures but further space is limited.

Handouts for households may not happen as the support measures focus on helping firms and shoring up investment spending. Property purchase controls may also be relaxed further and construction of social housing stepped up, according to Evans-Pritchard.

“But the absence of any major announcements or policy specifics does suggest a lack of urgency or that policymakers are struggling to come up with suitable measures to shore up growth. Either way, it’s not particularly reassuring for the near-term outlook,” he added.

Also read: China names Pan Gongsheng as new Central Bank Governor to revive economy

How large would be the stimulus?

Some fiscal stimulus is on the way but the stimulus package is expected to be mild because of the worsening indebtedness of local governments, according to Chris Leung, Chief China Economist - China & Hong Kong at DBS.

Room for aggressive monetary easing is also limited, with short-end rates likely to be brought down only by 10 basis points in the third quarter, according to DBS.

The stimulus hopes may not be met, Robert Carnell, Regional Head of Research, Asia-Pacific, warns.

“Instead of a bazooka, therefore, we expect we will see more of a shot-gun approach to stimulus, with many smaller and more targeted measures adopted. More of a micro response than a macro one, including a combination of further very modest monetary policy easings, extended subsidies and tax breaks, but no wall of money,” Carnell said in a note.