China’s economic stimulus gathers pace with consumption and property moves, but more needed for drastic reversal
- Policies to lower existing mortgage rates and tax cuts for families with children and elderly relatives are some of the most substantial taken
- And while they have fuelled expectations for further moves, analysts have warned that more would be needed as the ‘golden times’ for property sales has ended
China’s economic stimulus has begun to gather pace to deliver much needed growth momentum and defuse the financing risk in the property sector and at local government level, with the latest set of support measures introduced to lift household consumption, rescue the property market and shore up the yuan.
Thursday’s measures have also fuelled expectations that Beijing’s policymakers will further open their toolbox, as some analysts have warned they would not be enough to turn around the sluggish economic recovery, as well as weak consumer sentiment and investor confidence.
The mortgage rate cut is expected to reduce household expenditure by billions of yuan a year.
[These policies] mean the government is making changes one layer at a time instead of attempting to introduce a one-off fix
“It acts as a cumulative boost to market confidence, but a drastic reversal of the market’s low expectations will require a sustained new stimulus to be given in the future,” said Zhao Xijun, a finance professor at Renmin University.
“[These policies] mean the government is making changes one layer at a time instead of attempting to introduce a one-off fix.”
Zhao described the latest round as being “comparatively mild” but “comprehensive” as they covered areas including currency, tax and financial supervision.
“The gradual adjustment of rates could be to avoid seeing speculative bubbles in certain areas,” he added.
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There have been mounting calls from both economists at home and abroad urging for bigger stimulus packages and further loosening of monetary policy to address both imminent stagnation and long term structural problems.
But Beijing has appeared reluctant amid the backdrop of an already high level of local government debt and fears of triggering the levels of inflation seen in Western countries.
Critics also said there is a lack of political will and that the economy has suffered due to an increasingly tight grip on national security.
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Meanwhile, household savings in China are also reaching an all time high, reflecting weak confidence that has also dragged down consumption growth – identified as a major economic target to help meet the annual “around 5 per cent” gross domestic product growth target for 2023.
The new measures targeted at households, which will kick off later this month, will lower mortgages for first-time homebuyers to 20 per cent and from 40 to 30 per cent for second-time buyers.
Homebuyers can also apply to their banks for a lower interest rate on their existing loans.
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Meanwhile, tax reductions for taking care of children under three and for education will each be doubled from 1,000 yuan (US$137) to 2,000 yuan per month, the State Council announcement also said on Thursday.
But it is the crisis-hit residential property market, which accounts for roughly a quarter of the economy, that has been at the forefront of dragging down China’s economic growth.
The sector has been rattled with a debt crisis that has been on a downward spiral since 2021 after Beijing cracked down on property developers.
We all know that the golden times of earning much from property sales have ended
Overall investment in real estate development in the first seven months of the year fell by 8.5 per cent, year on year, to 6.77 trillion yuan (US$932 billion).
“There are so many apartments on sale, and no one came for an apartment viewing,” said Hangzhou-based college teacher Steve Lin, who is trying to sell his two-bedroom flat.
He hopes to see a more “active property market”, but believes his chances of finding a buyer are still dependent on the economy.
“We all know that the golden times of earning much from property sales have ended, and we will not be able to see a boom in property prices, we don’t have such fantasy any more,” he added.
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The latest policies were also met with scepticism from financial institutions, who questioned whether China’s economic recovery had hit rock bottom.
Fitch Ratings further lowered their expectations on China’s new home sales this year, with a forecast that they will fall by 10 to 15 per cent instead of the previous estimate of a zero to 5 per cent drop.
“Our sales forecast assumes the Chinese government’s policy response will not involve large monetary stimulus, while any incremental relaxation of home-purchasing restrictions will remain targeted and unlikely to reverse a structural normalisation in the sector,” said the ratings agency.
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An easing on mortgage rates would also mean banks must shoulder more burden to cut interest rates on existing mortgages, and has “drawn attention to how costly it may be for China’s banking sector”, Natixis Corporate & Investment Banking said on Friday.
“The impact of lowering outstanding mortgage rates on banks and households are still uncertain, depending on the upcoming changes in loan and deposit rates, more importantly, if consumer confidence can rebound on investment and properties,” the report said.
The managers of local government financing vehicles – the public and corporate hybrid entities created to skirt restrictions on local government borrowing – have also been calling for more support due to a lack of funding.
We must work together with financial institutions
“Sustainable development is inseparable from the new trend of urban development, financial balance is also inseparable from the balance of the overall regional economy,” Wang Dong, general manager of Xian Kaiyuan Lintong Investment Development Group, said during a seminar in Beijing on Thursday.
“We must work together with financial institutions.”
Larry Hu, chief China economist at Macquarie Group, expects more policies targeted at the property market to be introduced, but “it would take at least one to two weeks for policymakers to observe market reaction”.
Additional reporting by Mia Nulimaimaiti and He Huifeng
